Here’s What’s Happening With Returns At Ingevec (SNSE:INGEVEC)

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Ingevec's (SNSE:INGEVEC) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Ingevec:

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

0.038 = CL$4.2b ÷ (CL$151b - CL$39b) (Based on the trailing twelve months to September 2020).

Therefore, Ingevec has an ROCE of 3.8%. Even though it's in line with the industry average of 3.8%, it's still a low return by itself.

See our latest analysis for Ingevec

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ingevec's ROCE against it's prior returns. If you're interested in investigating Ingevec's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Ingevec Tell Us?

We're delighted to see that Ingevec is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 3.8% on its capital. And unsurprisingly, like most companies trying to break into the black, Ingevec is utilizing 118% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, Ingevec has decreased current liabilities to 26% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

Overall, Ingevec gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a staggering 374% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Ingevec does have some risks, we noticed 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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