Did you know that there are financial metrics that can provide clues to a potential multi-bagger? Typically, we will want to notice a growth trend come back on capital employed (ROCE) and at the same time, a base capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. Therefore, when we looked at ROCE trends at IMI (LON:IMI), we liked what we saw.
Return on capital employed (ROCE): what is it?
For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. The formula for this calculation on IMI is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.20 = £294 million ÷ (£2.2 billion – £728 million) (Based on the last twelve months to December 2021).
Thereby, IMI has a ROCE of 20%. In absolute terms, that’s excellent performance and even better than the machinery industry average of 11%.
Discover our latest analysis for IMI
In the chart above, we measured IMI’s past ROCE against its past performance, but the future is arguably more important. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
What does the ROCE trend tell us for IMI?
IMI is to be commended for its returns. The company has employed 28% more capital over the past five years, and the return on that capital has remained stable at 20%. Such returns are the envy of most companies and given that they have repeatedly reinvested at these rates, even better. If IMI can continue like this, we would be very optimistic about its future.
In summary, we are pleased to see that IMI has compounded returns by reinvesting at consistently high rates of return, as these are common characteristics of a multi-bagger. However, over the past five years, the stock has only offered a 21% return to shareholders who have held it during that time. That’s why it might be worth taking a closer look at this stock to find out if it has more characteristics of a multi-bagger.
One more thing we spotted 2 warning signs facing IMI that might be of interest to you.
If you want to see other businesses earning high returns, check out our free list of companies earning high returns with strong balance sheets here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.