iFabric (TSE:IFA) Will Want To Turn Around Its Return Trends
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating iFabric (TSE:IFA), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for iFabric:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.029 = CA$701k ÷ (CA$27m - CA$3.2m) (Based on the trailing twelve months to September 2023).
So, iFabric has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 11%.
Check out our latest analysis for iFabric
Historical performance is a great place to start when researching a stock so above you can see the gauge for iFabric's ROCE against it's prior returns. If you'd like to look at how iFabric has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For iFabric Tell Us?
On the surface, the trend of ROCE at iFabric doesn't inspire confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 2.9%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
What We Can Learn From iFabric's ROCE
Bringing it all together, while we're somewhat encouraged by iFabric's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 22% in the last five years. Therefore based on the analysis done in this article, we don't think iFabric has the makings of a multi-bagger.
On a separate note, we've found 1 warning sign for iFabric you'll probably want to know about.
While iFabric may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
