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There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Innovative Solutions and Support's (NASDAQ:ISSC) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Innovative Solutions and Support:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$2.7m ÷ (US$22m - US$2.0m) (Based on the trailing twelve months to December 2020).
Thus, Innovative Solutions and Support has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Aerospace & Defense industry.
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'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 Does the ROCE Trend For Innovative Solutions and Support Tell Us?
It's great to see that Innovative Solutions and Support has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 14% which is no doubt a relief for some early shareholders. 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 38%. This could potentially mean that the company is selling some of its assets.
Our Take On Innovative Solutions and Support's ROCE
In summary, it's great to see that Innovative Solutions and Support has been able to turn things around and earn higher returns on lower amounts of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.
On a separate note, we've found 2 warning signs for Innovative Solutions and Support you'll probably want to know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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.
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