IBC Advanced Alloys (CVE:IB) Shareholders Will Want The ROCE Trajectory To Continue

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. With that in mind, we've noticed some promising trends at IBC Advanced Alloys (CVE:IB) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for IBC Advanced Alloys, this is the formula:

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

0.084 = US$1.1m ÷ (US$25m - US$12m) (Based on the trailing twelve months to March 2022).

Therefore, IBC Advanced Alloys has an ROCE of 8.4%. On its own that's a low return, but compared to the average of 2.4% generated by the Metals and Mining industry, it's much better.

Check out our latest analysis for IBC Advanced Alloys

Historical performance is a great place to start when researching a stock so above you can see the gauge for IBC Advanced Alloys' ROCE against it's prior returns. If you're interested in investigating IBC Advanced Alloys' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

IBC Advanced Alloys has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 8.4% on its capital. In addition to that, IBC Advanced Alloys is employing 47% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Another thing to note, IBC Advanced Alloys has a high ratio of current liabilities to total assets of 47%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

Long story short, we're delighted to see that IBC Advanced Alloys' reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 49% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

IBC Advanced Alloys does have some risks though, and we've spotted 4 warning signs for IBC Advanced Alloys that you might be interested in.

While IBC Advanced Alloys may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.