If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That’s why when we briefly looked at Indutrade’s (STO:INDT) ROCE trend, we were pretty happy with 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. Analysts use this formula to calculate it for Indutrade:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.16 = kr2.3b ÷ (kr19b – kr5.4b) (Based on the trailing twelve months to March 2021).
So, Indutrade has an ROCE of 16%. That’s a relatively normal return on capital, and it’s around the 14% generated by the Machinery industry.
Check out our latest analysis for Indutrade
Above you can see how the current ROCE for Indutrade compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Indutrade’s ROCE Trending?
While the current returns on capital are decent, they haven’t changed much. The company has consistently earned 16% for the last five years, and the capital employed within the business has risen 128% in that time. 16% is a pretty standard return, and it provides some comfort knowing that Indutrade has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
To sum it up, Indutrade has simply been reinvesting capital steadily, at those decent rates of return. On top of that, the stock has rewarded shareholders with a remarkable 339% return to those who’ve held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
On a final note, we’ve found 2 warning signs for Indutrade that we think you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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