Returns to Image Assets (ASX:IMA) are on the rise

Did you know that there are financial metrics that can provide clues to a potential multi-bagger? A common approach is to try to find a company with Return on capital employed (ROCE) which is increasing, in line with growth amount capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. So when we looked Image Resources (ASX:IMA) and its ROCE trend, we really liked what we saw.

Understanding return on capital employed (ROCE)

For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. The formula for this calculation on image resources is as follows:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.18 = AU$27 million ÷ (AU$179 million – AU$32 million) (Based on the last twelve months to December 2021).

So, Image Resources has a ROCE of 18%. In absolute terms, that’s a decent return, but compared to the metals and mining industry average of 8.6%, it’s much better.

Check out our latest analysis for Image Assets

ASX: IMA Return on Capital Employed June 16, 2022

Although the past is not indicative 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 dive into Image Resources’ revenue, revenue, and cash flow history, check out these free graphics here.

What is the return trend?

The fact that Image Resources is now generating pre-tax profits on its past investments is very encouraging. About five years ago, the company was generating losses, but things have reversed as it now earns 18% on its capital. And unsurprisingly, like most companies trying to break into the dark, Image Resources is using 936% more capital than it did five years ago. This can tell us that the business has plenty of reinvestment opportunities that can generate higher returns.

By the way, we noticed that the improvement in ROCE seems to be partly fueled by an increase in current liabilities. Essentially, the company now has suppliers or short-term creditors funding about 18% of its operations, which is not ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets becomes particularly high, it can introduce new risks to the business.

The Key Takeaway

Much to the delight of most shareholders, Image Resources is now profitable. And since the stock has performed exceptionally well over the past five years, these trends are taken into account by investors. So given that the stock has proven to have some promising trends, it’s worth researching the company further to see if those trends are likely to persist.

Like most businesses, Image Resources comes with some risk, and we’ve found 3 warning signs of which you should be aware.

Although Image Resources isn’t currently generating the highest returns, we’ve compiled a list of companies that are currently generating over 25% return on equity. look at this free list here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.