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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating INSPECS Group (LON:SPEC), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for INSPECS Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.011 = UK£1.6m ÷ (UK£218m - UK£67m) (Based on the trailing twelve months to June 2024).
So, INSPECS Group has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 8.7%.
View our latest analysis for INSPECS Group
Above you can see how the current ROCE for INSPECS Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering INSPECS Group for free.
What Can We Tell From INSPECS Group's ROCE Trend?
On the surface, the trend of ROCE at INSPECS Group doesn't inspire confidence. Around five years ago the returns on capital were 24%, but since then they've fallen to 1.1%. However it looks like INSPECS Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by INSPECS Group's reinvestment in its own business, we're aware that returns are shrinking. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 87% over the last three years. Therefore based on the analysis done in this article, we don't think INSPECS Group has the makings of a multi-bagger.
Like most companies, INSPECS Group does come with some risks, and we've found 1 warning sign that you should be aware of.