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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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Information Services Group (NASDAQ:III) looks quite promising in regards to its trends of return on capital.
Understanding 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. To calculate this metric for Information Services Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$32m ÷ (US$221m - US$49m) (Based on the trailing twelve months to June 2022).
Therefore, Information Services Group has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 12% it's much better.
View our latest analysis for Information Services Group
Above you can see how the current ROCE for Information Services Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Information Services Group.
How Are Returns Trending?
Information Services Group's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 1,480% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
What We Can Learn From Information Services Group's ROCE
To sum it up, Information Services Group is collecting higher returns from the same amount of capital, and that's impressive. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 68% return over the last five years. In light of that, we think it's worth looking further into this stock because if Information Services Group can keep these trends up, it could have a bright future ahead.