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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Infomedia (ASX:IFM) and its ROCE trend, we weren't exactly thrilled.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Infomedia, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = AU$24m ÷ (AU$192m - AU$20m) (Based on the trailing twelve months to June 2020).
Therefore, Infomedia has an ROCE of 14%. That's a pretty standard return and it's in line with the industry average of 14%.
See our latest analysis for Infomedia
Above you can see how the current ROCE for Infomedia compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
Unfortunately, the trend isn't great with ROCE falling from 34% five years ago, while capital employed has grown 245%. Usually this isn't ideal, but given Infomedia conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Infomedia probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
In Conclusion...
In summary, despite lower returns in the short term, we're encouraged to see that Infomedia is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 132% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
Like most companies, Infomedia does come with some risks, and we've found 2 warning signs that you should be aware of.
While Infomedia isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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