Investors Will Want IRIS Corporation Berhad's (KLSE:IRIS) Growth In ROCE To Persist

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Speaking of which, we noticed some great changes in IRIS Corporation Berhad's (KLSE:IRIS) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on IRIS Corporation Berhad is:

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

0.0075 = RM2.5m ÷ (RM509m - RM170m) (Based on the trailing twelve months to March 2022).

Thus, IRIS Corporation Berhad has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Tech industry average of 9.2%.

Check out our latest analysis for IRIS Corporation Berhad

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

What The Trend Of ROCE Can Tell Us

Shareholders will be relieved that IRIS Corporation Berhad has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.7% on its capital. While returns have increased, the amount of capital employed by IRIS Corporation Berhad has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 33%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

Our Take On IRIS Corporation Berhad's ROCE

In summary, we're delighted to see that IRIS Corporation Berhad has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Astute investors may have an opportunity here because the stock has declined 18% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

IRIS Corporation Berhad does have some risks though, and we've spotted 3 warning signs for IRIS Corporation Berhad that you might be interested in.

While IRIS Corporation Berhad 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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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.