If we want to find a title that could multiply over the long term, what are the underlying trends to look for? In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. This shows us that it is a composing machine, capable of continually reinvesting its profits in the business and generating higher returns. However, after briefly reviewing the numbers, we don’t think Ingevec (SNSE: INGEVEC) has the makings of a multi-bagger in the future, but let’s see why this may be the case.
What is Return on Employee Capital (ROCE)?
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. The formula for this calculation on Ingevec is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.045 = CL $ 5.1b CL (CL $ 164b – CL $ 50b) (Based on the last twelve months up to March 2021).
Therefore, Ingevec posts a ROCE of 4.5%. In absolute terms, that’s a low return, but it’s way better than the construction industry average of 3.3%.
Discover our latest analysis for Ingevec
Although the past is not representative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to dig deeper into Ingevec’s past, check out this free graph of past income, income and cash flow.
What the ROCE trend can tell us
On the surface, the ROCE trend at Ingevec does not inspire confidence. About five years ago, returns on capital were 7.1%, but since then they have fallen to 4.5%. And since incomes have fallen while employing more capital, we would be cautious. If this were to continue, you might consider a business that is trying to reinvest for growth, but is actually losing market share since sales haven’t increased.
What we can learn from Ingevec’s ROCE
Based on the above analysis, we find it rather worrying that Ingevec’s returns on capital and sales have declined, despite the company employing more capital than five years ago. Yet despite these poor fundamentals, the stock has gained a whopping 236% over the past five years, so investors are looking very bullish. Either way, we don’t feel very comfortable with the fundamentals so we’re avoiding this title for now.
Since virtually every business faces risks, it’s worth knowing about them, and we’ve spotted 4 warning signs for Ingevec (1 of which is a bit rude!) that you should be aware of.
While Ingevec does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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