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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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Inter-Rock Minerals' (CVE:IRO) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Inter-Rock Minerals:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$2.4m ÷ (US$26m - US$10.0m) (Based on the trailing twelve months to March 2024).
Therefore, Inter-Rock Minerals has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 11% it's much better.
Check out our latest analysis for Inter-Rock Minerals
Historical performance is a great place to start when researching a stock so above you can see the gauge for Inter-Rock Minerals' ROCE against it's prior returns. If you'd like to look at how Inter-Rock Minerals has performed in the past in other metrics, you can view this free graph of Inter-Rock Minerals' past earnings, revenue and cash flow.
How Are Returns Trending?
Inter-Rock Minerals is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 15%. Basically the business is earning more per dollar of capital invested and in addition to that, 35% more capital is being employed now too. So we're very much inspired by what we're seeing at Inter-Rock Minerals thanks to its ability to profitably reinvest capital.
What We Can Learn From Inter-Rock Minerals' ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Inter-Rock Minerals has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 84% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.