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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at IDEX (NYSE:IEX) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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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. The formula for this calculation on IDEX is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$706m ÷ (US$6.7b - US$630m) (Based on the trailing twelve months to December 2024).
Thus, IDEX has an ROCE of 12%. By itself that's a normal return on capital and it's in line with the industry's average returns of 12%.
Check out our latest analysis for IDEX
In the above chart we have measured IDEX's 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 analyst report for IDEX .
The Trend Of ROCE
On the surface, the trend of ROCE at IDEX doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 12%. However it looks like IDEX might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
Our Take On IDEX's ROCE
To conclude, we've found that IDEX is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 22% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
While IDEX doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for IEX on our platform.