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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at IBC Advanced Alloys (CVE:IB) and its trend of ROCE, we really liked what we saw.
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 IBC Advanced Alloys, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = US$1.1m ÷ (US$25m - US$12m) (Based on the trailing twelve months to March 2022).
So, IBC Advanced Alloys has an ROCE of 8.4%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 3.3%.
Check out our latest analysis for IBC Advanced Alloys
Historical performance is a great place to start when researching a stock so above you can see the gauge for IBC Advanced Alloys' ROCE against it's prior returns. If you're interested in investigating IBC Advanced Alloys' past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From IBC Advanced Alloys' ROCE Trend?
The fact that IBC Advanced Alloys is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 8.4% on its capital. Not only that, but the company is utilizing 47% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
On a separate but related note, it's important to know that IBC Advanced Alloys has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On IBC Advanced Alloys' ROCE
Long story short, we're delighted to see that IBC Advanced Alloys' reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 40% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.