The Returns At IntraSoft Technologies (NSE:ISFT) Provide Us With Signs Of What's To Come

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at IntraSoft Technologies (NSE:ISFT) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for IntraSoft Technologies, this is the formula:

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

0.011 = ₹28m ÷ (₹2.9b - ₹326m) (Based on the trailing twelve months to June 2020).

Therefore, IntraSoft Technologies has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Online Retail industry average of 2.0%.

See our latest analysis for IntraSoft Technologies

Historical performance is a great place to start when researching a stock so above you can see the gauge for IntraSoft Technologies' ROCE against it's prior returns. If you're interested in investigating IntraSoft Technologies' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From IntraSoft Technologies' ROCE Trend?

In terms of IntraSoft Technologies' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 4.4%, but since then they've fallen to 1.1%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, IntraSoft Technologies has done well to pay down its current liabilities to 11% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

We're a bit apprehensive about IntraSoft Technologies because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Unsurprisingly then, the stock has dived 84% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 5 warning signs for IntraSoft Technologies (2 are a bit unpleasant) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list 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. 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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