IRESS Limited (ASX:IRE): Assessing Capital Returns

I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in IRESS Limited (ASX:IRE).

IRESS stock represents an ownership share in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. To understand IRESS’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

Check out our latest analysis for IRESS

IRESS’s Return On Capital Employed

Choosing to invest in IRESS comes at the cost of investing in another potentially favourable company. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. We’ll look at IRESS’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. IRE’s ROCE is calculated below:

ROCE Calculation for IRE

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = AU$79.74m ÷ (AU$671.56m – AU$51.20m) = 12.85%

IRE’s 12.85% ROCE means that for every A$100 you invest, the company creates A$12.9. This shows IRESS provides an uninspiring capital return that is slightly below the 15% ROCE that is typically considered to be a strong benchmark. Nevertheless, if IRE is clever with their reinvestments or dividend payments, investors can still grow their capital but may not see the same compounded performance as other high-returning companies.

ASX:IRE Last Perf July 12th 18
ASX:IRE Last Perf July 12th 18

What is causing this?

IRE doesn’t return an attractive amount on capital, but this will only continue if the company is unable to increase earnings or decrease current capital requirements. Because of this, it is important to look beyond the final value of IRE’s ROCE and understand what is happening to the individual components. Three years ago, IRE’s ROCE was 11.76%, which means the company’s capital returns have improved. With this, the current earnings of AU$79.74m improved from AU$63.40m and the amount of capital employed also grew but by a proportionally lesser volume, which suggests the larger ROCE is due to a growth in earnings relative to capital requirements.

Next Steps

Despite IRE’s current ROCE remains at an unattractive level, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. It is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and valuation to determine if an opportunity exists that isn’t made apparent by looking at past data. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate IRE or move on to other alternatives.

  1. Future Outlook: What are well-informed industry analysts predicting for IRE’s future growth? Take a look at our free research report of analyst consensus for IRE’s outlook.
  2. Valuation: What is IRE worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether IRE is currently undervalued by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.