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What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Inter Parfums (NASDAQ:IPAR), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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 Inter Parfums is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = US$56m ÷ (US$816m - US$119m) (Based on the trailing twelve months to September 2020).
Therefore, Inter Parfums has an ROCE of 8.0%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 16%.
Above you can see how the current ROCE for Inter Parfums compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Inter Parfums here for free.
What Does the ROCE Trend For Inter Parfums Tell Us?
On the surface, the trend of ROCE at Inter Parfums doesn't inspire confidence. To be more specific, ROCE has fallen from 11% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
The Key Takeaway
We're a bit apprehensive about Inter Parfums because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 202% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
On a final note, we've found 1 warning sign for Inter Parfums that we think you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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