What Do The Returns On Capital At IAG Holdings (HKG:8513) Tell Us?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think IAG Holdings (HKG:8513) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on IAG Holdings is:

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

0.064 = S$1.4m ÷ (S$30m - S$8.8m) (Based on the trailing twelve months to September 2020).

So, IAG Holdings has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 10%.

See our latest analysis for IAG Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for IAG Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of IAG Holdings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at IAG Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 54% over the last four years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, IAG Holdings has decreased its current liabilities to 29% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On IAG Holdings' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for IAG Holdings. Furthermore the stock has climbed 8.3% over the last year, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know about the risks facing IAG Holdings, we've discovered 3 warning signs that you should be aware of.

While IAG Holdings 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. 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.
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