Industria de Diseño Textil (BME:ITX) Knows How To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Ergo, when we looked at the ROCE trends at Industria de Diseño Textil (BME:ITX), we liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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 Industria de Diseño Textil:

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

0.27 = €5.8b ÷ (€31b - €10b) (Based on the trailing twelve months to April 2023).

Thus, Industria de Diseño Textil has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 9.5%.

See our latest analysis for Industria de Diseño Textil

In the above chart we have measured Industria de Diseño Textil's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Industria de Diseño Textil here for free.

How Are Returns Trending?

We'd be pretty happy with returns on capital like Industria de Diseño Textil. The company has consistently earned 27% for the last five years, and the capital employed within the business has risen 44% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Industria de Diseño Textil can keep this up, we'd be very optimistic about its future.

The Bottom Line On Industria de Diseño Textil's ROCE

Industria de Diseño Textil has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. Therefore it's no surprise that shareholders have earned a respectable 50% return if they held 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.

One more thing to note, we've identified 1 warning sign with Industria de Diseño Textil and understanding it should be part of your investment process.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.