Iofina's (LON:IOF) Returns On Capital Are Heading Higher

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Iofina (LON:IOF) so let's look a bit deeper.

Understanding 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. Analysts use this formula to calculate it for Iofina:

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

0.11 = US$3.4m ÷ (US$40m - US$7.8m) (Based on the trailing twelve months to June 2021).

Thus, Iofina has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.

Check out our latest analysis for Iofina

In the above chart we have measured Iofina's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Iofina's ROCE Trending?

Iofina has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 11% which is a sight for sore eyes. Not only that, but the company is utilizing 66% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 20%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Iofina has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

In summary, it's great to see that Iofina has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a solid 61% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Iofina can keep these trends up, it could have a bright future ahead.

Like most companies, Iofina does come with some risks, and we've found 2 warning signs that you should be aware of.

While Iofina 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.