What trends should we look for it we want to identify stocks that can 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. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in ICO Group’s (HKG:1460) returns on capital, so let’s have a look.
Return On Capital Employed (ROCE): What Is It?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for ICO Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.079 = HK$49m ÷ (HK$848m – HK$235m) (Based on the trailing twelve months to September 2023).
Thus, ICO Group has an ROCE of 7.9%. In absolute terms, that’s a low return but it’s around the IT industry average of 7.0%.
See our latest analysis for ICO Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for ICO Group’s 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 ICO Group.
What Does the ROCE Trend For ICO Group Tell Us?
While in absolute terms it isn’t a high ROCE, it’s promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 7.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 55% more capital is being employed now too. So we’re very much inspired by what we’re seeing at ICO Group thanks to its ability to profitably reinvest capital.
The Key Takeaway
All in all, it’s terrific to see that ICO Group is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 69% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.
On a final note, we found 5 warning signs for ICO Group (1 is significant) you should be aware of.
While ICO Group may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
Valuation is complex, but we’re helping make it simple.
Find out whether ICO Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
