Iceland Seafood International hf (ICE:ICESEA) Might Be Having Difficulty Using Its Capital Effectively

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. Although, when we looked at Iceland Seafood International hf (ICE:ICESEA), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Iceland Seafood International hf is:

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

0.11 = €15m ÷ (€279m - €144m) (Based on the trailing twelve months to December 2021).

Therefore, Iceland Seafood International hf has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Consumer Retailing industry.

See our latest analysis for Iceland Seafood International hf

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'd like to look at how Iceland Seafood International hf has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Iceland Seafood International hf's ROCE Trending?

On the surface, the trend of ROCE at Iceland Seafood International hf doesn't inspire confidence. To be more specific, ROCE has fallen from 27% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Iceland Seafood International hf has decreased its current liabilities to 51% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 51% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Iceland Seafood International hf's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Iceland Seafood International hf. And long term investors must be optimistic going forward because the stock has returned a huge 178% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Iceland Seafood International hf does have some risks though, and we've spotted 1 warning sign for Iceland Seafood International hf that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.