We're Watching These Trends At IVU Traffic Technologies (ETR:IVU)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at IVU Traffic Technologies' (ETR:IVU) ROCE trend, we were pretty happy with what we saw.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for IVU Traffic Technologies, this is the formula:

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

0.12 = €7.9m ÷ (€109m - €41m) (Based on the trailing twelve months to September 2020).

Therefore, IVU Traffic Technologies has an ROCE of 12%. In isolation, that's a pretty standard return but against the Software industry average of 15%, it's not as good.

Check out our latest analysis for IVU Traffic Technologies

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

How Are Returns Trending?

While the current returns on capital are decent, they haven't changed much. The company has employed 70% more capital in the last five years, and the returns on that capital have remained stable at 12%. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Our Take On IVU Traffic Technologies' ROCE

In the end, IVU Traffic Technologies has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 392% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a separate note, we've found 1 warning sign for IVU Traffic Technologies you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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