If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings back into the business at ever-higher rates of return. Speaking of which, we noticed some great changes in Exchange Income’s (TSE:EIF) returns on capital, so let’s have a look.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Exchange Income is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.068 = CA$148m ÷ (CA$2.5b – CA$285m) (Based on the trailing twelve months to March 2020).
Therefore, Exchange Income has an ROCE of 6.8%. In absolute terms, that’s a low return and it also under-performs the Airlines industry average of 8.5%.
In the above chart we have a measured Exchange Income’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 report for Exchange Income.
What The Trend Of ROCE Can Tell Us
While in absolute terms it isn’t a high ROCE, it’s promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 6.8%. The amount of capital employed has increased too, by 131%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
Our Take On Exchange Income’s ROCE
All in all, it’s terrific to see that Exchange Income is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 64% to shareholders over the last five years, it’s fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it’s worth researching the company further to see if these trends are likely to persist.
If you’d like to know more about Exchange Income, we’ve spotted 4 warning signs, and 2 of them can’t be ignored.
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.
If you’re looking to trade Exchange Income, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex,…
Go to the news source: Will the Promising Trends At Exchange Income (TSE:EIF) Continue?