If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at ICO Group (HKG:1460), it didn’t seem to tick all of these boxes.
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. To calculate this metric for ICO Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.062 = HK$39m ÷ (HK$961m – HK$339m) (Based on the trailing twelve months to September 2024).
Thus, ICO Group has an ROCE of 6.2%. Even though it’s in line with the industry average of 6.1%, it’s still a low return by itself.
View our latest analysis for ICO Group
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of ICO Group.
The Trend Of ROCE
The returns on capital haven’t changed much for ICO Group in recent years. The company has employed 47% more capital in the last five years, and the returns on that capital have remained stable at 6.2%. This poor ROCE doesn’t inspire confidence right now, and with the increase in capital employed, it’s evident that the business isn’t deploying the funds into high return investments.
Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn’t increased to 35% of total assets, this reported ROCE would probably be less than6.2% because total capital employed would be higher.The 6.2% ROCE could be even lower if current liabilities weren’t 35% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.
In Conclusion…
In conclusion, ICO Group has been investing more capital into the business, but returns on that capital haven’t increased. And in the last five years, the stock has given away 37% so the market doesn’t look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don’t think ICO Group has the makings of a multi-bagger.
ICO Group does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.
While ICO Group 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.
