Intelbras - Indústria de Telecomunicação Eletrônica Brasileira (BVMF:INTB3) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Intelbras - Indústria de Telecomunicação Eletrônica Brasileira (BVMF:INTB3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Intelbras - Indústria de Telecomunicação Eletrônica Brasileira, this is the formula:

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

0.14 = R$490m ÷ (R$4.7b - R$1.3b) (Based on the trailing twelve months to September 2023).

So, Intelbras - Indústria de Telecomunicação Eletrônica Brasileira has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Communications industry average of 7.3% it's much better.

See our latest analysis for Intelbras - Indústria de Telecomunicação Eletrônica Brasileira

Above you can see how the current ROCE for Intelbras - Indústria de Telecomunicação Eletrônica Brasileira 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 Intelbras - Indústria de Telecomunicação Eletrônica Brasileira here for free.

What The Trend Of ROCE Can Tell Us

In terms of Intelbras - Indústria de Telecomunicação Eletrônica Brasileira's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 24% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

On a side note, Intelbras - Indústria de Telecomunicação Eletrônica Brasileira has done well to pay down its current liabilities to 27% 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. 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.

The Bottom Line

To conclude, we've found that Intelbras - Indústria de Telecomunicação Eletrônica Brasileira is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 26% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a separate note, we've found 1 warning sign for Intelbras - Indústria de Telecomunicação Eletrônica Brasileira you'll probably want to know about.

While Intelbras - Indústria de Telecomunicação Eletrônica Brasileira isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.