In This Article:
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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Integral Diagnostics (ASX:IDX) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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 Integral Diagnostics, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.053 = AU$40m ÷ (AU$839m - AU$83m) (Based on the trailing twelve months to June 2023).
So, Integral Diagnostics has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 7.2%.
View our latest analysis for Integral Diagnostics
In the above chart we have measured Integral Diagnostics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Integral Diagnostics here for free.
What Does the ROCE Trend For Integral Diagnostics Tell Us?
In terms of Integral Diagnostics' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 18%, but since then they've fallen to 5.3%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
In Conclusion...
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Integral Diagnostics. These trends are starting to be recognized by investors since the stock has delivered a 28% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
Integral Diagnostics does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...