There Are Reasons To Feel Uneasy About Intelbras - Indústria de Telecomunicação Eletrônica Brasileira's (BVMF:INTB3) Returns On Capital

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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. Analysts use this formula to calculate it for Intelbras - Indústria de Telecomunicação Eletrônica Brasileira:

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

0.15 = R$358m ÷ (R$3.4b - R$1.0b) (Based on the trailing twelve months to March 2022).

Thus, 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 6.7% generated by the Communications industry.

View 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, you can check out the forecasts from the analysts covering Intelbras - Indústria de Telecomunicação Eletrônica Brasileira here for free.

What Can We Tell From Intelbras - Indústria de Telecomunicação Eletrônica Brasileira's ROCE Trend?

On the surface, the trend of ROCE at Intelbras - Indústria de Telecomunicação Eletrônica Brasileira doesn't inspire confidence. To be more specific, ROCE has fallen from 26% over the last five years. 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. 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.

What We Can Learn From 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 there could be an opportunity here if other metrics look good too, because the stock has declined 12% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Intelbras - Indústria de Telecomunicação Eletrônica Brasileira (of which 1 is potentially serious!) that you should know about.

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.