Should We Be Excited About The Trends Of Returns At InvoCare (ASX:IVC)?
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at InvoCare (ASX:IVC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on InvoCare is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = AU$86m ÷ (AU$1.7b - AU$169m) (Based on the trailing twelve months to June 2020).
So, InvoCare has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 8.9%.
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, you can check out the forecasts from the analysts covering InvoCare here for free.
The Trend Of ROCE
The trend of ROCE doesn't look fantastic because it's fallen from 9.3% five years ago, while the business's capital employed increased by 78%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence InvoCare might not have received a full period of earnings contribution from it. Additionally, we found that InvoCare's most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.
The Bottom Line On InvoCare's ROCE
In summary, InvoCare is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 5.2% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
InvoCare does have some risks though, and we've spotted 5 warning signs for InvoCare that you might be interested in.
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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