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If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So on that note, IBEX (NASDAQ:IBEX) looks quite promising in regards to its trends of return on capital.
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. Analysts use this formula to calculate it for IBEX:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = US$34m ÷ (US$304m - US$125m) (Based on the trailing twelve months to December 2021).
Therefore, IBEX has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 13% generated by the IT industry.
Check out our latest analysis for IBEX
Above you can see how the current ROCE for IBEX compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is IBEX's ROCE Trending?
Investors would be pleased with what's happening at IBEX. The data shows that returns on capital have increased substantially over the last five years to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 290% more capital is being employed now too. So we're very much inspired by what we're seeing at IBEX thanks to its ability to profitably reinvest capital.
One more thing to note, IBEX has decreased current liabilities to 41% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.
The Key Takeaway
To sum it up, IBEX has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Given the stock has declined 30% in the last year, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.