What Can The Trends At Innovative Solutions and Support (NASDAQ:ISSC) Tell Us About Their Returns?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in Innovative Solutions and Support's (NASDAQ:ISSC) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Innovative Solutions and Support:

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

0.098 = US$2.7m ÷ (US$42m - US$14m) (Based on the trailing twelve months to September 2020).

Therefore, Innovative Solutions and Support has an ROCE of 9.8%. Even though it's in line with the industry average of 9.8%, it's still a low return by itself.

Check out our latest analysis for Innovative Solutions and Support

Historical performance is a great place to start when researching a stock so above you can see the gauge for Innovative Solutions and Support's ROCE against it's prior returns. If you're interested in investigating Innovative Solutions and Support's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Innovative Solutions and Support's ROCE Trending?

Innovative Solutions and Support has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 9.8%, which is always encouraging. While returns have increased, the amount of capital employed by Innovative Solutions and Support has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 33% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Key Takeaway

To sum it up, Innovative Solutions and Support is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 196% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 3 warning signs for Innovative Solutions and Support you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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