Stock Analysis

Here's What To Make Of IES Holdings' (NASDAQ:IESC) Returns On Capital

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NasdaqGM:IESC
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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of IES Holdings (NASDAQ:IESC) looks decent, right now, so lets see what the trend of returns can tell us.

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. The formula for this calculation on IES Holdings is:

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

0.18 = US$57m ÷ (US$561m - US$242m) (Based on the trailing twelve months to September 2020).

Thus, IES Holdings has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 10% generated by the Construction industry.

Check out our latest analysis for IES Holdings

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NasdaqGM:IESC Return on Capital Employed January 3rd 2021

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 IES Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 18% for the last five years, and the capital employed within the business has risen 170% in that time. 18% is a pretty standard return, and it provides some comfort knowing that IES Holdings has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a separate but related note, it's important to know that IES Holdings has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In the end, IES Holdings has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 313% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One final note, you should learn about the 2 warning signs we've spotted with IES Holdings (including 1 which can't be ignored) .

While IES Holdings 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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What are the risks and opportunities for IES Holdings?

IES Holdings, Inc. designs and installs integrated electrical and technology systems, and provides infrastructure products and services in the United States.

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Rewards

  • Price-To-Earnings ratio (21.7x) is below the Construction industry average (21.9x)

Risks

  • Profit margins (1.7%) are lower than last year (4%)

  • Large one-off items impacting financial results

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