There Are Reasons To Feel Uneasy About InvoCare's (ASX:IVC) Returns On Capital
There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at InvoCare (ASX:IVC), it didn't seem to tick all of these boxes.
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. To calculate this metric for InvoCare, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.045 = AU$68m ÷ (AU$1.7b - AU$203m) (Based on the trailing twelve months to December 2022).
So, InvoCare has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 8.6%.
View our latest analysis for InvoCare
Above you can see how the current ROCE for InvoCare compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for InvoCare.
What Can We Tell From InvoCare's ROCE Trend?
On the surface, the trend of ROCE at InvoCare doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.5% from 9.4% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that InvoCare is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 8.6% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
If you're still interested in InvoCare it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
While InvoCare 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.
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