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Innovative Solutions and Support (NASDAQ:ISSC) Is Looking To Continue Growing Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, we've noticed some promising trends at Innovative Solutions and Support (NASDAQ:ISSC) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Innovative Solutions and Support, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.14 = US$3.3m ÷ (US$27m - US$4.0m) (Based on the trailing twelve months to June 2021).

Therefore, Innovative Solutions and Support has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Aerospace & Defense industry average of 8.9% it's much better.

View our latest analysis for Innovative Solutions and Support

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While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Innovative Solutions and Support, check out these free graphs here.

How Are Returns Trending?

Like most people, we're pleased that Innovative Solutions and Support is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 14% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 31%. This could potentially mean that the company is selling some of its assets.

In Conclusion...

In a nutshell, we're pleased to see that Innovative Solutions and Support has been able to generate higher returns from less capital. Since the stock has returned a staggering 160% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Innovative Solutions and Support can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Innovative Solutions and Support, we've discovered 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.