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Will The ROCE Trend At IEC Electronics (NASDAQ:IEC) Continue?

Simply Wall St
·3 min read

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. So when we looked at IEC Electronics (NASDAQ:IEC) and its trend of ROCE, we really liked what we saw.

What is 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 IEC Electronics is:

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

0.14 = US$9.8m ÷ (US$111m - US$40m) (Based on the trailing twelve months to March 2020).

Thus, IEC Electronics has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 10% generated by the Electronic industry.

View our latest analysis for IEC Electronics

roce
roce

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're interested in investigating IEC Electronics' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For IEC Electronics Tell Us?

We're delighted to see that IEC Electronics 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 14% which is a sight for sore eyes. Not only that, but the company is utilizing 118% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 36%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that IEC Electronics has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From IEC Electronics' ROCE

Overall, IEC Electronics gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a staggering 131% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing: We've identified 4 warning signs with IEC Electronics (at least 1 which is potentially serious) , and understanding them would certainly be useful.

While IEC Electronics 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.

This article by Simply Wall St is general in nature. 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@simplywallst.com.