IG Port (TYO:3791) Is Experiencing Growth In Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in IG Port's (TYO:3791) returns on capital, so let's have a look.

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. To calculate this metric for IG Port, this is the formula:

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

0.083 = JP¥489m ÷ (JP¥13b - JP¥6.9b) (Based on the trailing twelve months to February 2021).

Thus, IG Port has an ROCE of 8.3%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 15%.

View our latest analysis for IG Port

Above you can see how the current ROCE for IG Port compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for IG Port.

What Does the ROCE Trend For IG Port Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 8.3%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 22%. So we're very much inspired by what we're seeing at IG Port thanks to its ability to profitably reinvest capital.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 54% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line On IG Port's ROCE

To sum it up, IG Port has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 86% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching IG Port, you might be interested to know about the 3 warning signs that our analysis has discovered.

While IG Port 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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