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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Imaspro Corporation Berhad (KLSE:IMASPRO), it didn't seem to tick all of these boxes.
Understanding 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 Imaspro Corporation Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = RM5.4m ÷ (RM134m - RM3.3m) (Based on the trailing twelve months to September 2022).
Therefore, Imaspro Corporation Berhad has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 8.0%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Imaspro Corporation Berhad's ROCE against it's prior returns. If you'd like to look at how Imaspro Corporation Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Imaspro Corporation Berhad's ROCE Trending?
Things have been pretty stable at Imaspro Corporation Berhad, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Imaspro Corporation Berhad doesn't end up being a multi-bagger in a few years time.
In summary, Imaspro Corporation Berhad isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Yet to long term shareholders the stock has gifted them an incredible 250% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
On a separate note, we've found 2 warning signs for Imaspro Corporation Berhad you'll probably want to know about.
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.
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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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