If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after briefly looking over the numbers, we don't think i3 Verticals (NASDAQ:IIIV) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on i3 Verticals is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.038 = US$12m ÷ (US$351m - US$31m) (Based on the trailing twelve months to March 2020).
Thus, i3 Verticals has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the IT industry average of 10.0%.
In the above chart we have a measured i3 Verticals' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From i3 Verticals' ROCE Trend?
We weren't thrilled with the trend because i3 Verticals' ROCE has reduced by 50% over the last three years, while the business employed 220% more capital. Usually this isn't ideal, but given i3 Verticals conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence i3 Verticals might not have received a full period of earnings contribution from it.
The Bottom Line On i3 Verticals' ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for i3 Verticals have fallen, meanwhile the business is employing more capital than it was three years ago. But investors must be expecting an improvement of sorts because over the last yearthe stock has delivered a respectable 21% return. Regardless, we don't feel to comfortable with the fundamentals so we'd be steering clear of this stock for now.
If you're still interested in i3 Verticals it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
While i3 Verticals 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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