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Returns On Capital Are Showing Encouraging Signs At Intrepid Potash (NYSE:IPI)
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Intrepid Potash (NYSE:IPI) and its trend of ROCE, we really liked what we saw.
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 Intrepid Potash:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0077 = US$3.8m ÷ (US$557m - US$66m) (Based on the trailing twelve months to June 2021).
Therefore, Intrepid Potash has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 9.8%.
See our latest analysis for Intrepid Potash
In the above chart we have measured Intrepid Potash's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Intrepid Potash.
How Are Returns Trending?
Shareholders will be relieved that Intrepid Potash has broken into profitability. The company now earns 0.8% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. 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. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
What We Can Learn From Intrepid Potash's ROCE
To bring it all together, Intrepid Potash has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 280% 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.
Intrepid Potash does have some risks though, and we've spotted 2 warning signs for Intrepid Potash that you might be interested in.
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. 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.
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About NYSE:IPI
Intrepid Potash
Engages in the extraction and production of the potash in the United States and internationally.
Flawless balance sheet and fair value.