Investors Shouldn't Overlook Innovative Solutions and Support's (NASDAQ:ISSC) Impressive Returns On Capital
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Innovative Solutions and Support's (NASDAQ:ISSC) look very promising so lets take a look.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)
0.20 = US$6.6m ÷ (US$36m - US$3.4m) (Based on the trailing twelve months to December 2022).
Therefore, Innovative Solutions and Support has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Aerospace & Defense industry average of 9.4%.
See our latest analysis for Innovative Solutions and Support
Historical performance is a great place to start when researching a stock so above you can see the gauge for Innovative Solutions and Support's ROCE against it's prior returns. If you'd like to look at how Innovative Solutions and Support has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Innovative Solutions and Support's ROCE Trend?
Innovative Solutions and Support 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 20% on its capital. While returns have increased, the amount of capital employed by Innovative Solutions and Support 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. Because in the end, a business can only get so efficient.
To bring it all together, Innovative Solutions and Support has done well to increase the returns it's generating from its capital employed. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
While Innovative Solutions and Support looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether ISSC is currently trading for a fair price.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here