Iofina (LON:IOF) Is Achieving High Returns On Its Capital
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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Iofina's (LON:IOF) returns on capital, so let's have a look.
Understanding 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. The formula for this calculation on Iofina is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = US$9.6m ÷ (US$53m - US$9.1m) (Based on the trailing twelve months to December 2022).
So, Iofina has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 12%.
Check out our latest analysis for Iofina
In the above chart we have measured Iofina's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Iofina here for free.
The Trend Of ROCE
We're delighted to see that Iofina is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 22% which is a sight for sore eyes. Not only that, but the company is utilizing 34% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Bottom Line
Overall, Iofina gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 72% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Iofina can keep these trends up, it could have a bright future ahead.
Iofina does have some risks though, and we've spotted 1 warning sign for Iofina that you might be interested in.
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.
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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.
