Return Trends At Exchange Income (TSE:EIF) Aren't Appealing

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. However, after investigating Exchange Income (TSE:EIF), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Exchange Income is:

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

0.072 = CA$212m ÷ (CA$3.5b - CA$499m) (Based on the trailing twelve months to September 2022).

Therefore, Exchange Income has an ROCE of 7.2%. Even though it's in line with the industry average of 6.7%, it's still a low return by itself.

View our latest analysis for Exchange Income

Above you can see how the current ROCE for Exchange Income compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Exchange Income.

What Can We Tell From Exchange Income's ROCE Trend?

There are better returns on capital out there than what we're seeing at Exchange Income. The company has employed 117% more capital in the last five years, and the returns on that capital have remained stable at 7.2%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On Exchange Income's ROCE

In summary, Exchange Income has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 124% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 3 warning signs with Exchange Income (at least 1 which is potentially serious) , and understanding these would certainly be useful.

While Exchange Income 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.