What Do The Returns On Capital At Insteel Industries (NASDAQ:IIIN) Tell Us?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating Insteel Industries (NASDAQ:IIIN), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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 Insteel Industries is:

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

0.044 = US$12m ÷ (US$337m - US$60m) (Based on the trailing twelve months to June 2020).

Thus, Insteel Industries has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Building industry average of 14%.

Check out 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'd like, you can check out the forecasts from the analysts covering Insteel Industries here for free.

What Can We Tell From Insteel Industries' ROCE Trend?

When we looked at the ROCE trend at Insteel Industries, we didn't gain much confidence. To be more specific, ROCE has fallen from 12% over the last five years. However it looks like Insteel Industries might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Insteel Industries' ROCE

To conclude, we've found that Insteel Industries is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 19% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you want to continue researching Insteel Industries, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Insteel Industries 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.

This article by Simply Wall St is general in nature. 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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