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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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Itafos (CVE:IFOS) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
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 Itafos, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = US$106m ÷ (US$666m - US$94m) (Based on the trailing twelve months to September 2024).
Therefore, Itafos has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 8.2% it's much better.
See our latest analysis for Itafos
Historical performance is a great place to start when researching a stock so above you can see the gauge for Itafos' ROCE against it's prior returns. If you'd like to look at how Itafos has performed in the past in other metrics, you can view this free graph of Itafos' past earnings, revenue and cash flow.
So How Is Itafos' ROCE Trending?
Shareholders will be relieved that Itafos has broken into profitability. The company now earns 19% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.
Our Take On Itafos' ROCE
As discussed above, Itafos appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 253% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
