We Like These Underlying Return On Capital Trends At Iron Road (ASX:IRD)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Iron Road (ASX:IRD) and its trend of ROCE, we really liked what we saw.

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What Is 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 Iron Road is:

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

0.041 = AU$5.7m ÷ (AU$140m - AU$1.3m) (Based on the trailing twelve months to December 2024).

Thus, Iron Road has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 8.7%.

Check out our latest analysis for Iron Road

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'd like to look at how Iron Road has performed in the past in other metrics, you can view this free graph of Iron Road's past earnings, revenue and cash flow.

How Are Returns Trending?

Shareholders will be relieved that Iron Road has broken into profitability. The company now earns 4.1% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Key Takeaway

To bring it all together, Iron Road has done well to increase the returns it's generating from its capital employed. And since the stock has dived 71% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

If you'd like to know more about Iron Road, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

While Iron Road 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.