Returns On Capital Are Showing Encouraging Signs At IBC Advanced Alloys (CVE:IB)
What are the early trends we should look for to identify a stock that could 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at IBC Advanced Alloys (CVE:IB) and its trend of ROCE, we really liked what we saw.
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. To calculate this metric for IBC Advanced Alloys, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = US$1.1m ÷ (US$25m - US$12m) (Based on the trailing twelve months to March 2022).
So, IBC Advanced Alloys has an ROCE of 8.4%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 3.3%.
Check out our latest analysis for IBC Advanced Alloys
Historical performance is a great place to start when researching a stock so above you can see the gauge for IBC Advanced Alloys' ROCE against it's prior returns. If you're interested in investigating IBC Advanced Alloys' past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From IBC Advanced Alloys' ROCE Trend?
The fact that IBC Advanced Alloys is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 8.4% on its capital. Not only that, but the company is utilizing 47% 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.
On a separate but related note, it's important to know that IBC Advanced Alloys has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On IBC Advanced Alloys' ROCE
Long story short, we're delighted to see that IBC Advanced Alloys' reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 40% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
Like most companies, IBC Advanced Alloys does come with some risks, and we've found 3 warning signs that you should be aware of.
While IBC Advanced Alloys 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.
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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.
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