What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Incitec Pivot (ASX:IPL) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Incitec Pivot, this is the formula:

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

0.14 = AU$1.2b ÷ (AU$10b - AU$1.4b) (Based on the trailing twelve months to March 2023).

Therefore, Incitec Pivot has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 8.7% it's much better.

See our latest analysis for Incitec Pivot  roce

In the above chart we have measured Incitec Pivot's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Incitec Pivot here  for free.

What Does the ROCE Trend For Incitec Pivot Tell Us?

We like the trends that we're seeing from Incitec Pivot. The data shows that returns on capital have increased substantially over the last five years to 14%. The amount of capital employed has increased too, by 31%. So we're very much inspired by what we're seeing at Incitec Pivot thanks to its ability to profitably reinvest capital.

What We Can Learn From Incitec Pivot's ROCE

All in all, it's terrific to see that Incitec Pivot is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 21% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.



On a final note, we found 2 warning signs for Incitec Pivot (1 is concerning)  you should be aware of.

If you want to search for solid companies with great earnings, check out this freelist of companies with good balance sheets and impressive returns on equity.

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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.