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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Itim Group (LON:ITIM), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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 Itim Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.01 = UK£133k ÷ (UK£19m - UK£6.5m) (Based on the trailing twelve months to June 2024).
So, Itim Group has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Software industry average of 10.0%.
View our latest analysis for Itim Group
Above you can see how the current ROCE for Itim Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Itim Group .
The Trend Of ROCE
When we looked at the ROCE trend at Itim Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 5.2% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 33%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 1.0%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
The Bottom Line On Itim Group's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Itim Group is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 48% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.