Stock Analysis

Investors Met With Slowing Returns on Capital At Inter-Rock Minerals (CVE:IRO)

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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Looking at Inter-Rock Minerals (CVE:IRO), it does have a high ROCE right now, but lets see how returns are trending.

Understanding Return On Capital Employed (ROCE)

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-Rock Minerals:

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

0.22 = US$3.1m ÷ (US$21m - US$6.9m) (Based on the trailing twelve months to September 2022).

Thus, Inter-Rock Minerals has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Food industry average of 7.3%.

See our latest analysis for Inter-Rock Minerals

TSXV:IRO Return on Capital Employed March 14th 2023

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're interested in investigating Inter-Rock Minerals' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Inter-Rock Minerals' ROCE Trending?

Over the past five years, Inter-Rock Minerals' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. Although current returns are high, we'd need more evidence of underlying growth for it to look like a multi-bagger going forward.

The Bottom Line On Inter-Rock Minerals' ROCE

While Inter-Rock Minerals has impressive profitability from its capital, it isn't increasing that amount of capital. Since the stock has gained an impressive 74% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 1 warning sign for Inter-Rock Minerals that we think you should be aware of.

Inter-Rock Minerals is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

Valuation is complex, but we're helping make it simple.

Find out whether Inter-Rock Minerals is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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