Yahoo Finance Many Would Be Envious Of Insteel Industries' (NYSE:IIIN) Excellent Returns On Capital
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Ergo, when we looked at the ROCE trends at Insteel Industries (NYSE:IIIN), we liked what we saw.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Insteel Industries is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.28 = US$89m ÷ (US$391m - US$69m) (Based on the trailing twelve months to October 2021).
Thus, Insteel Industries has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Building industry average of 14%.
View our latest analysis for Insteel Industries
In the above chart we have measured Insteel Industries' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
We'd be pretty happy with returns on capital like Insteel Industries. Over the past five years, ROCE has remained relatively flat at around 28% and the business has deployed 35% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Insteel Industries can keep this up, we'd be very optimistic about its future.
Our Take On Insteel Industries' ROCE
In short, we'd argue Insteel Industries has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And given the stock has only risen 36% over the last five years, we'd suspect the market is beginning to recognize these trends. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.
Insteel Industries does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...
Insteel Industries is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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