What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Inter Parfums' (NASDAQ:IPAR) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Inter Parfums:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$159m ÷ (US$1.1b - US$249m) (Based on the trailing twelve months to September 2022).
Therefore, Inter Parfums has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 14% generated by the Personal Products industry.
View our latest analysis for Inter Parfums
In the above chart we have measured Inter Parfums' 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 Inter Parfums.
What Does the ROCE Trend For Inter Parfums Tell Us?
Inter Parfums is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 18%. The amount of capital employed has increased too, by 42%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line On Inter Parfums' ROCE
To sum it up, Inter Parfums has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Inter Parfums does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
While Inter Parfums 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 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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