Slowing FX Earnings Yield Rates (TSE:EIF) Leave Little Room for Enthusiasm

To find a multi-bagger stock, what are the underlying trends we should look for in a company? In a perfect world, we’d like to see a company invest more capital into its business, and ideally the returns on that capital increase as well. If you see this, it usually means this is a company with a great business model and plenty of profitable reinvestment opportunities. That said, at first glance Exchange income (TSE: EIF) we don’t jump out of our chairs at changing yields, but let’s take a closer look.

Return on capital employed (ROCE): what is it?

For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. Analysts use this formula to calculate foreign exchange income:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.084 = 293 million Canadian dollars ÷ (4.0 billion Canadian dollars – 570 million Canadian dollars) (Based on the last twelve months to March 2024).

SO, Exchange Income has an ROCE of 8.4%. In absolute terms this is a low return, but it is around the airline industry average of 8.6%.

Check out our latest analysis for exchange earnings

In the chart above, we measured Exchange Income’s past ROCE against its past performance, but the future is arguably more important. If you wish, you can view forecasts from analysts covering foreign exchange earnings for free.

What can we say about Exchange Income’s ROCE trend?

There are better returns on capital than we see at Exchange Income. The company has employed 92% more capital over the past five years and the return on that capital has remained stable at 8.4%. This low ROCE does not inspire confidence at the moment, and with the increase in capital employed, it is evident that the company is not deploying the funds into high-return investments.

The bottom line on trading revenue ROCE

In conclusion, Exchange Income has invested more capital into the business, but the returns on that capital have not increased. Although the market should expect these trends to improve as the stock has gained 51% over the past five years. But if the trajectory of these underlying trends continues, we think the likelihood of it being a multi-bagger from here is not high.

Finally, we found 2 Warning Signs for Foreign Exchange Income which we think you should be aware of.

If you want to look for solid companies with strong profits, check this out free list of companies with good balance sheets and impressive returns on equity.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to constitute financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or your financial situation. Our goal is to provide you with targeted, long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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