IDEX's (NYSE:IEX) Returns Prove To Be Reliable Given Its Industry Exposures

By
Michael Paige
Published
May 26, 2021
NYSE:IEX

The nature of IDEX's business provides it with exposure to different industries and end-markets, many of which have bright futures. It develops, designs and manufactures products for fluid management and specialty engineering needs for numerous industries.

The higher growth industries it's exposed to include: agriculture, life sciences, automotive, semi-conductors, food, pharmaceuticals, industrial and water. While the lower growth industries would include oil, gas, chemicals, and fire & safety.

The exposure to these areas, along with its reputation in its field, could serve the company well in the years to come as these growing industries will continue to require specialty solutions from IDEX. 


NYSE:IEX - End Market Exposure 2020 - Source: 2020 10-K

There are some financial metrics that can provide us with insights on how this growth is going both in terms of investment, and the returns on investment. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE (Return on Capital Employed) of IDEX ( NYSE:IEX ) looks decent, right now, so let's see what the trend of returns can tell us.

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. To calculate this metric for IDEX, this is the formula:

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

0.14 = US$556m ÷ (US$4.5b - US$378m) (Based on the trailing twelve months to March 2021) .

Thus, IDEX has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 9.4% it's much better.

Check out our latest analysis for IDEX

roce
NYSE:IEX Return on Capital Employed May 26th 2021

Above you can see how the current ROCE for IDEX compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analyst's predictions in our free report on analyst forecasts for the company .

What Can We Tell From IDEX's ROCE Trend?

While the returns on capital are good, they haven't moved much since they've been around 14-16% over the last few years. However, the company has employed 43% more capital in the last five years, and as mentioned, the returns on that capital have remained stable. Since 14% is a moderate ROCE, it's good to see the business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency, they can pay off in terms of share price returns.

This explains why we've seen a consistent and gradual increase in the share price over time for IDEX. The company has been able to continually reinvest, at decent rates of return, which ultimately grows the bottom line and thus the share price. 

Given the end-markets that IDEX is exposed to and the services it provides to these industries, it appears likely that continual reinvestment of capital will be able to continue to occur, and the rates of return are likely to remain stable.   

It's an added bonus that the company has proven its capability at incrementally increasing the dividend over time as well, all the while the payout ratio (currently 40%) leaves plenty of room for this reinvestment to occur.


NYSE:IEX: Stability and Growth of Payments - May 26th 2021

The Bottom Line

To sum it up, IDEX has simply been reinvesting capital steadily, at those decent rates of return. And the stock has done incredibly well with a 183% return over the last five years, so long-term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further given its end-market exposures and its reinvestment capabilities. 

On a final note, we've found 1 warning sign for IDEX that we think you should be aware of.

While IDEX may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Promoted
If you decide to trade IDEX, use the lowest-cost* platform that is rated #1 Overall by Barron's, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account.

Simply Wall St analyst Michael Paige and Simply Wall St have no position in any of the companies mentioned. This article 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.


Simply Wall St character - Warren

Simply Wall St

Simply Wall St is a financial technology startup focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of equity analysts with a public, market-beating track record.