Some Investors May Be Worried About Intelbras - Indústria de Telecomunicação Eletrônica Brasileira's (BVMF:INTB3) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Although, when we looked at Intelbras - Indústria de Telecomunicação Eletrônica Brasileira (BVMF:INTB3), it didn't seem to tick all of these boxes.

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. 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)

0.19 = R$412m ÷ (R$3.1b - R$958m) (Based on the trailing twelve months to September 2021).

So, Intelbras - Indústria de Telecomunicação Eletrônica Brasileira has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Communications industry average of 6.9% it's much better.

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

When we looked at the ROCE trend at Intelbras - Indústria de Telecomunicação Eletrônica Brasileira, we didn't gain much confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 19%. 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.

On a related note, Intelbras - Indústria de Telecomunicação Eletrônica Brasileira has decreased its current liabilities to 30% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 Bottom Line 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. Furthermore the stock has climbed 92% over the last year, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One final note, you should learn about the 2 warning signs we've spotted with Intelbras - Indústria de Telecomunicação Eletrônica Brasileira (including 1 which is concerning) .

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.