IVP (NSE:IVP) Is Investing Its Capital With Increasing Efficiency

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at IVP's (NSE:IVP) look very promising so lets take a look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for IVP, this is the formula:

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

0.32 = ₹299m ÷ (₹3.7b - ₹2.8b) (Based on the trailing twelve months to March 2022).

Thus, IVP has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 16%.

Check out our latest analysis for IVP

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're interested in investigating IVP's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

The trends we've noticed at IVP are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 32%. The amount of capital employed has increased too, by 25%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 75% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what IVP has. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 2.3% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you'd like to know more about IVP, we've spotted 4 warning signs, and 2 of them don't sit too well with us.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.