What Can The Trends At IPS (TYO:4335) Tell Us About Their Returns?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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, we've noticed some promising trends at IPS (TYO:4335) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for IPS:

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

0.18 = JP¥210m ÷ (JP¥1.6b - JP¥386m) (Based on the trailing twelve months to September 2020).

So, IPS has an ROCE of 18%. That's a relatively normal return on capital, and it's around the 15% generated by the IT industry.

Check out our latest analysis for IPS

Historical performance is a great place to start when researching a stock so above you can see the gauge for IPS' ROCE against it's prior returns. If you'd like to look at how IPS has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is IPS' ROCE Trending?

We like the trends that we're seeing from IPS. Over the last two years, returns on capital employed have risen substantially to 18%. The amount of capital employed has increased too, by 20%. So we're very much inspired by what we're seeing at IPS thanks to its ability to profitably reinvest capital.

The Key Takeaway

To sum it up, IPS has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if IPS can keep these trends up, it could have a bright future ahead.

On a final note, we found 2 warning signs for IPS (1 is significant) you should be aware of.

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. 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.
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