Intelbras - Indústria de Telecomunicação Eletrônica Brasileira's (BVMF:INTB3) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. However, after briefly looking over the numbers, we don't think Intelbras - Indústria de Telecomunicação Eletrônica Brasileira (BVMF:INTB3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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)

0.15 = R$429m ÷ (R$4.4b - R$1.5b) (Based on the trailing twelve months to September 2022).

Therefore, Intelbras - Indústria de Telecomunicação Eletrônica Brasileira has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 7.5% generated by the Communications industry.

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

In the above chart we have measured Intelbras - Indústria de Telecomunicação Eletrônica Brasileira's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Intelbras - Indústria de Telecomunicação Eletrônica Brasileira Tell Us?

On the surface, the trend of ROCE at Intelbras - Indústria de Telecomunicação Eletrônica Brasileira doesn't inspire confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 15%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Intelbras - Indústria de Telecomunicação Eletrônica Brasileira's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Intelbras - Indústria de Telecomunicação Eletrônica Brasileira is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 28% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

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.