What We Make Of Inter-Rock Minerals' (CVE:IRO) Returns On Capital

If you're looking for a multi-bagger, there's a few things to 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Inter-Rock Minerals (CVE:IRO) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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 Inter-Rock Minerals is:

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

0.17 = US$2.5m ÷ (US$19m - US$4.8m) (Based on the trailing twelve months to September 2020).

Therefore, Inter-Rock Minerals has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 9.0% it's much better.

Check out our latest analysis for Inter-Rock Minerals

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.

What Does the ROCE Trend For Inter-Rock Minerals Tell Us?

Inter-Rock Minerals is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 225% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 25%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Key Takeaway

All in all, it's terrific to see that Inter-Rock Minerals is reaping the rewards from prior investments and is growing its capital base. And with a respectable 52% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Inter-Rock Minerals can keep these trends up, it could have a bright future ahead.

On a final note, we found 2 warning signs for Inter-Rock Minerals (1 is concerning) you should be aware of.

While Inter-Rock Minerals 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. 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.
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