Ircon International (NSE:IRCON) Has Some Way To Go To Become A Multi-Bagger

Simply Wall St · 10/19 02:08

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Ircon International (NSE:IRCON), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Ircon International, this is the formula:

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

0.079 = ₹8.1b ÷ (₹174b - ₹71b) (Based on the trailing twelve months to June 2024).

Thus, Ircon International has an ROCE of 7.9%. Ultimately, that's a low return and it under-performs the Construction industry average of 15%.

View our latest analysis for Ircon International

roce
NSEI:IRCON Return on Capital Employed October 19th 2024

In the above chart we have measured Ircon International's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Ircon International .

So How Is Ircon International's ROCE Trending?

There are better returns on capital out there than what we're seeing at Ircon International. Over the past five years, ROCE has remained relatively flat at around 7.9% and the business has deployed 35% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Another thing to note, Ircon International has a high ratio of current liabilities to total assets of 41%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

As we've seen above, Ircon International's returns on capital haven't increased but it is reinvesting in the business. Yet to long term shareholders the stock has gifted them an incredible 570% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 1 warning sign facing Ircon International that you might find interesting.

While Ircon International 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.