Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of IPD Group (ASX:IPG) looks great, so lets see what the trend can tell us.

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. Analysts use this formula to calculate it for IPD Group:

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

0.27 = AU$21m ÷ (AU$136m - AU$57m) (Based on the trailing twelve months to December 2022).

Thus, IPD Group has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 9.1% earned by companies in a similar industry.

View our latest analysis for IPD Group

Above you can see how the current ROCE for IPD Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for IPD Group.

How Are Returns Trending?

We like the trends that we're seeing from IPD Group. The numbers show that in the last two years, the returns generated on capital employed have grown considerably to 27%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 69%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a separate but related note, it's important to know that IPD Group has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On IPD Group's ROCE

All in all, it's terrific to see that IPD Group is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 168% to shareholders over the last year, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if IPD Group can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for IPD Group that we think you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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