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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of International Holding Company PJSC (ADX:IHC) we really liked what we saw.
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. To calculate this metric for International Holding Company PJSC, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = د.إ2.6b ÷ (د.إ20b - د.إ8.7b) (Based on the trailing twelve months to March 2021).
So, International Holding Company PJSC has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Food industry average of 9.5%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of International Holding Company PJSC, check out these free graphs here.
So How Is International Holding Company PJSC's ROCE Trending?
The fact that International Holding Company PJSC is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses two years ago, but now it's earning 24% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, International Holding Company PJSC is utilizing 910% more capital than it was two years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 44% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.
The Bottom Line On International Holding Company PJSC's ROCE
Long story short, we're delighted to see that International Holding Company PJSC's reinvestment activities have paid off and the company is now profitable. And with the stock having performed exceptionally well over the last year, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you'd like to know more about International Holding Company PJSC, we've spotted 2 warning signs, and 1 of them is potentially serious.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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