- Commercial Services
Many Would Be Envious Of Ion Exchange (India)'s (NSE:IONEXCHANG) Excellent Returns On Capital
There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Ion Exchange (India) (NSE:IONEXCHANG) looks attractive right now, so lets see what the trend of returns can tell us.
Understanding 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 Ion Exchange (India):
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.28 = ₹2.2b ÷ (₹17b - ₹9.4b) (Based on the trailing twelve months to December 2022).
So, Ion Exchange (India) has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Commercial Services industry average of 14%.
See 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 Does the ROCE Trend For Ion Exchange (India) Tell Us?
It's hard not to be impressed by Ion Exchange (India)'s returns on capital. The company has consistently earned 28% for the last five years, and the capital employed within the business has risen 213% in that time. Now considering ROCE is an attractive 28%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Ion Exchange (India) can keep this up, we'd be very optimistic about its future.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 55% 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. Although because current liabilities are still 55%, some of that risk is still prevalent.
The Key Takeaway
In summary, we're delighted to see that Ion Exchange (India) has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Therefore it's no surprise that shareholders have earned a respectable 84% return if they 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.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
Ion Exchange (India) is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
Valuation is complex, but we're helping make it simple.
Find out whether Ion Exchange (India) is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
Ion Exchange (India)
Ion Exchange (India) Limited, together with its subsidiaries, provides water treatment and environment management solutions in Indian and internationally.
Flawless balance sheet with outstanding track record and pays a dividend.