I-Tech (STO:ITECH) Is Experiencing Growth In Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, I-Tech (STO:ITECH) looks quite promising in regards to its trends of return on capital.

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 I-Tech is:

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

0.17 = kr23m ÷ (kr152m - kr16m) (Based on the trailing twelve months to December 2023).

Thus, I-Tech has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 12% it's much better.

View our latest analysis for I-Tech

Above you can see how the current ROCE for I-Tech 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 I-Tech.

What Can We Tell From I-Tech's ROCE Trend?

We're delighted to see that I-Tech is reaping rewards from its investments and has now broken into profitability. The company now earns 17% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by I-Tech 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. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

Our Take On I-Tech's ROCE

To sum it up, I-Tech is collecting higher returns from the same amount of capital, and that's impressive. Given the stock has declined 40% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing to note, we've identified 1 warning sign with I-Tech and understanding this should be part of your investment process.

While I-Tech 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.