Returns On Capital Are Showing Encouraging Signs At IRC (HKG:1029)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at IRC (HKG:1029) so let's look a bit deeper.

What is 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. Analysts use this formula to calculate it for IRC:

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

0.079 = US$46m ÷ (US$681m - US$98m) (Based on the trailing twelve months to December 2020).

Thus, IRC has an ROCE of 7.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.1%.

Check out our latest analysis for IRC

In the above chart we have measured IRC'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 IRC's ROCE Trending?

IRC 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 7.9% which is a sight for sore eyes. In addition to that, IRC is employing 67% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

What We Can Learn From IRC's ROCE

Long story short, we're delighted to see that IRC's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 274% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing: We've identified 4 warning signs with IRC (at least 2 which can't be ignored) , and understanding these would certainly be useful.

While IRC 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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