Investors Shouldn't Overlook The Favourable Returns On Capital At Ion Exchange (India) (NSE:IONEXCHANG)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Ion Exchange (India)'s (NSE:IONEXCHANG) ROCE trend, we were very happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

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 Ion Exchange (India) is:

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

0.24 = ₹2.5b ÷ (₹21b - ₹11b) (Based on the trailing twelve months to September 2023).

Thus, Ion Exchange (India) has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.

Check out our latest analysis for Ion Exchange (India)

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Ion Exchange (India), check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We'd be pretty happy with returns on capital like Ion Exchange (India). The company has employed 254% more capital in the last five years, and the returns on that capital have remained stable at 24%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 51% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

What We Can Learn From Ion Exchange (India)'s ROCE

In short, we'd argue Ion Exchange (India) has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 109% return to those who've held over the last year. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

Ion Exchange (India) does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

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.