Returns On Capital Signal Tricky Times Ahead For Ircon International (NSE:IRCON)

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Ircon International (NSE:IRCON) and its ROCE trend, we weren't exactly thrilled.

Our free stock report includes 1 warning sign investors should be aware of before investing in Ircon International. Read for free now.

What Is 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. To calculate this metric for Ircon International, this is the formula:

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

0.057 = ₹6.5b ÷ (₹179b - ₹65b) (Based on the trailing twelve months to December 2024).

So, Ircon International has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 16%.

View our latest analysis for Ircon International

In the above chart we have measured Ircon International'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 analyst report for Ircon International .

The Trend Of ROCE

On the surface, the trend of ROCE at Ircon International doesn't inspire confidence. To be more specific, ROCE has fallen from 7.9% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Ircon International's ROCE

In summary, we're somewhat concerned by Ircon International's diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 399% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

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

While Ircon International isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.