Investors Will Want IES Holdings' (NASDAQ:IESC) Growth In ROCE To Persist

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at IES Holdings (NASDAQ:IESC) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on IES Holdings is:

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

0.19 = US$100m ÷ (US$889m - US$373m) (Based on the trailing twelve months to March 2023).

So, IES Holdings has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 12% it's much better.

View our latest analysis for IES Holdings

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.

What Can We Tell From IES Holdings' ROCE Trend?

Investors would be pleased with what's happening at IES Holdings. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 110% more capital is being employed now too. So we're very much inspired by what we're seeing at IES Holdings thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that IES Holdings has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On IES Holdings' ROCE

All in all, it's terrific to see that IES Holdings is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 234% to shareholders over the last five years, it looks like investors are recognizing 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 IES Holdings, you might be interested to know about the 1 warning sign that our analysis has discovered.

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. 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.