Investors Should Be Encouraged By Ice Make Refrigeration's (NSE:ICEMAKE) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Ice Make Refrigeration's (NSE:ICEMAKE) look very promising so lets take a look.

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. Analysts use this formula to calculate it for Ice Make Refrigeration:

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

0.29 = ₹290m ÷ (₹1.8b - ₹854m) (Based on the trailing twelve months to December 2023).

Therefore, Ice Make Refrigeration has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Machinery industry average of 18%.

See our latest analysis for Ice Make Refrigeration

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ice Make Refrigeration's ROCE against it's prior returns. If you'd like to look at how Ice Make Refrigeration has performed in the past in other metrics, you can view this free graph of Ice Make Refrigeration's past earnings, revenue and cash flow.

What Can We Tell From Ice Make Refrigeration's ROCE Trend?

Ice Make Refrigeration is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 29%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 102%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, Ice Make Refrigeration's current liabilities are still rather high at 46% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Ice Make Refrigeration's ROCE

In summary, it's great to see that Ice Make Refrigeration can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 662% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 1 warning sign for Ice Make Refrigeration that we think you should be aware of.

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.

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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.