What trends should we look for if we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; first growth come back on capital employed (ROCE) and on the other hand, growth amount capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. And in light of that, the trends we see at Insimbi Industrial Holdings’ (JSE:ISB) look very promising, so let’s take a look.
Return on capital employed (ROCE): what is it?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for Insimbi Industrial Holdings, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.22 = R194m ÷ (R1.6b – R729m) (Based on the last twelve months to February 2022).
Thereby, Insimbi Industrial Holdings has a ROCE of 22%. This is a fantastic return and not only that, it exceeds the 14% average earned by companies in a similar industry.
See our latest analysis for Insimbi Industrial Holdings
Historical performance is a great starting point when researching a stock. So above you can see Insimbi Industrial Holdings’ ROCE gauge compared to its past returns. If you want to dive deep into Insimbi Industrial Holdings’ earnings, revenue, and cash flow history, check out these free graphics here.
What does the ROCE trend tell us for Insimbi Industrial Holdings?
The trends we’ve noticed at Insimbi Industrial Holdings are quite reassuring. Figures show that over the past five years, returns generated on capital employed have increased significantly to 22%. The amount of capital employed also increased by 56%. So we’re very inspired by what we’re seeing at Insimbi Industrial Holdings with its ability to reinvest capital profitably.
By the way, we noticed that the improvement in ROCE seems to be partly fueled by an increase in current liabilities. Current liabilities have increased to 46% of total assets, so the company is now financed more by suppliers or short-term creditors. And with current liabilities at these levels, that’s pretty high.
In conclusion…
A business that increases its returns on capital and can constantly reinvest in itself is a highly sought after trait, and that is what Insimbi Industrial Holdings possesses. And since the stock has fallen 11% in the past five years, there could be an opportunity here. It therefore seems warranted to do further research on this company and determine whether or not these trends will continue.
Finally we found 4 warning signs for Insimbi Industrial Holdings which we think you should be aware of.
High yields are a key ingredient to strong performance, so check out our free list of stocks generating high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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