There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at i3 Verticals (NASDAQ:IIIV) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look. Return On Capital Employed (ROCE): What is it?
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. Analysts use this formula to calculate it for i3 Verticals:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.016 = US$9.0m ÷ (US$652m – US$97m) (Based on the trailing twelve months to September 2021) .
Therefore, i3 Verticals has an ROCE of 1.6%. Ultimately, that’s a low return and it under-performs the IT industry average of 14%. NasdaqGS:IIIV Return on Capital Employed December 26th 2021
In the above chart we have measured i3 Verticals’ 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 report for i3 Verticals . How Are Returns Trending?
On the surface, the trend of ROCE at i3 Verticals doesn’t inspire confidence. To be more specific, ROCE has fallen from 9.1% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance. The Key Takeaway
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for i3 Verticals. These trends are starting to be recognized by investors since the stock has delivered a 1.3% gain to shareholders who’ve held over the last three years. Therefore we’d recommend looking further into this stock to confirm if it has the makings of a good investment.
One more thing to note, we’ve identified 1 warning sign with i3 Verticals and understanding this should be part of your investment process.
While i3 Verticals isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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 […]