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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at iFabric (TSE:IFA) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for iFabric, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.036 = CA$795k ÷ (CA$26m - CA$3.2m) (Based on the trailing twelve months to March 2024).
Therefore, iFabric has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Luxury industry average of 13%.
View our latest analysis for iFabric
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating iFabric's past further, check out this free graph covering iFabric's past earnings, revenue and cash flow.
What Does the ROCE Trend For iFabric Tell Us?
iFabric has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 3.6% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, iFabric is utilizing 91% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
In Conclusion...
Overall, iFabric gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Considering the stock has delivered 25% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.
One more thing, we've spotted 1 warning sign facing iFabric that you might find interesting.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.