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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Immersion (NASDAQ:IMMR) so let's look a bit deeper.
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. The formula for this calculation on Immersion is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = US$56m ÷ (US$1.2b - US$438m) (Based on the trailing twelve months to June 2024).
So, Immersion has an ROCE of 7.4%. Ultimately, that's a low return and it under-performs the Tech industry average of 9.9%.
Check out our latest analysis for Immersion
In the above chart we have measured Immersion's 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 Immersion for free.
What Does the ROCE Trend For Immersion Tell Us?
Immersion 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 7.4% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Immersion is utilizing 552% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 37% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
In Conclusion...
In summary, it's great to see that Immersion has managed to break into profitability and is continuing to reinvest in its business. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 18% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.