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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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 when we looked at Itafos (CVE:IFOS) 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. The formula for this calculation on Itafos is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = US$92m ÷ (US$585m - US$91m) (Based on the trailing twelve months to March 2024).
Therefore, Itafos has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 7.6% it's much better.
Check out our latest analysis for Itafos
Historical performance is a great place to start when researching a stock so above you can see the gauge for Itafos' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Itafos.
What Can We Tell From Itafos' ROCE Trend?
Itafos has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 19% on its capital. While returns have increased, the amount of capital employed by Itafos has remained flat over the period. 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.
Our Take On Itafos' ROCE
To sum it up, Itafos is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has only returned 30% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
While Itafos looks impressive, no company is worth an infinite price. The intrinsic value infographic for IFOS helps visualize whether it is currently trading for a fair price.