In This Article:
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Imperial Brands' (LON:IMB) look very promising so lets take a look.
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 Imperial Brands, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = UK£3.5b ÷ (UK£28b - UK£11b) (Based on the trailing twelve months to September 2024).
Therefore, Imperial Brands has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Tobacco industry average of 18%.
Check out our latest analysis for Imperial Brands
In the above chart we have measured Imperial Brands' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Imperial Brands .
What Can We Tell From Imperial Brands' ROCE Trend?
Imperial Brands has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 72%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 23% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Imperial Brands may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
Another thing to note, Imperial Brands has a high ratio of current liabilities to total assets of 41%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
In the end, Imperial Brands has proven it's capital allocation skills are good with those higher returns from less amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.