Yahoo Finance IBU-tec advanced materials (ETR:IBU) Is Reinvesting At Lower Rates Of Return
To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. In light of that, when we looked at IBU-tec advanced materials (ETR:IBU) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on IBU-tec advanced materials is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.012 = €974k ÷ (€82m - €2.6m) (Based on the trailing twelve months to June 2023).
So, IBU-tec advanced materials has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 8.5%.
See our latest analysis for IBU-tec advanced materials
In the above chart we have measured IBU-tec advanced materials' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for IBU-tec advanced materials .
How Are Returns Trending?
On the surface, the trend of ROCE at IBU-tec advanced materials doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.2% from 2.2% five years ago. However it looks like IBU-tec advanced materials might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by IBU-tec advanced materials' reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 33% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
One final note, you should learn about the 3 warning signs we've spotted with IBU-tec advanced materials (including 2 which are potentially serious) .
While IBU-tec advanced materials 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.
