If we are to find a title that could multiply over the long term, what are the underlying trends that we need to look for? Ideally, a business will display two trends; first growth to recover on capital employed (ROCE) and on the other hand, an increase amount capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. Speaking of which, we have noticed some big changes in PJSC International Holding Company (ADX: IHC) returns on capital, so let’s take a look.
Understanding Return on Capital Employed (ROCE)
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for International Holding Company PJSC, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.14 = Ø¯.Ø¥ 4.6 b Ã· (Ø¯.Ø¥ 58 b – Ø¯.Ø¥ 25 b) (Based on the last twelve months up to June 2021).
Thereby, International Holding Company PJSC has a ROCE of 14%. In absolute terms, this is a satisfactory return, but compared to the food industry average of 9.5%, it is much better.
Check out our latest analysis for International Holding Company PJSC
Although the past is not representative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you would like to see how International Holding Company PJSC has performed in the past in other measures, you can see this free graph of past income, income and cash flow.
How are the returns evolving?
It is very encouraging that International Holding Company PJSC is now generating pre-tax profits on its previous investments. Shareholders will no doubt be delighted because the company was in deficit two years ago but now generates 14% of its capital. And unsurprisingly, like most companies trying to break into the dark, International Holding Company PJSC is using 2,101% more equity than it was two years ago. This may tell us that the company has many reinvestment opportunities capable of generating higher returns.
For the record, there was a noticeable increase in the company’s current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially, the business now has short-term suppliers or creditors funding about 42% of its operations, which is not ideal. And with current liabilities at these levels, it’s pretty high.
The key to take away
To the delight of most shareholders, International Holding Company PJSC has now returned to profitability. Given that the stock has returned 276% to shareholders in the past year, it looks like investors are recognizing these changes. So, given that the stock has proven to have some promising trends, it is worth doing more research on the company to see if these trends are likely to continue.
Before drawing any conclusions, we need to know what value we are getting for the current stock price. This is where you can consult our FREE estimate of intrinsic value which compares the stock price and the estimated value.
If you want to look for solid businesses with great income, check out this free list of companies with good balance sheets and impressive returns on equity.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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