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

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. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Intelbras - Indústria de Telecomunicação Eletrônica Brasileira (BVMF:INTB3) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Intelbras - Indústria de Telecomunicação Eletrônica Brasileira is:

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

0.14 = R$463m ÷ (R$5.0b - R$1.7b) (Based on the trailing twelve months to December 2022).

So, Intelbras - Indústria de Telecomunicação Eletrônica Brasileira has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 7.8% generated by the Communications industry.

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 to see what analysts are forecasting going forward, you should check out our free report for Intelbras - Indústria de Telecomunicação Eletrônica Brasileira.

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. Around five years ago the returns on capital were 27%, but since then they've fallen to 14%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

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

While returns have fallen for Intelbras - Indústria de Telecomunicação Eletrônica Brasileira in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 18% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, Intelbras - Indústria de Telecomunicação Eletrônica Brasileira does come with some risks, and we've found 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.