Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at ironSource (NYSE:IS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for ironSource:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.075 = US$85m ÷ (US$1.5b - US$309m) (Based on the trailing twelve months to December 2021).
Thus, ironSource has an ROCE of 7.5%. Ultimately, that's a low return and it under-performs the Software industry average of 9.4%.
Check out our latest analysis for ironSource
Above you can see how the current ROCE for ironSource compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering ironSource here for free.
So How Is ironSource's ROCE Trending?
When we looked at the ROCE trend at ironSource, we didn't gain much confidence. Over the last two years, returns on capital have decreased to 7.5% from 17% two years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, ironSource has decreased its current liabilities to 21% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
Our Take On ironSource's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that ironSource is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 51% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.