INTERSHOP Communications (ETR:ISHA) Is Experiencing Growth In Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in INTERSHOP Communications' (ETR:ISHA) returns on capital, so let's have a look.

What is 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. To calculate this metric for INTERSHOP Communications, this is the formula:

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

0.039 = €1.1m ÷ (€40m - €12m) (Based on the trailing twelve months to March 2021).

So, INTERSHOP Communications has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Software industry average of 13%.

View our latest analysis for INTERSHOP Communications

Above you can see how the current ROCE for INTERSHOP Communications compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering INTERSHOP Communications here for free.

What Does the ROCE Trend For INTERSHOP Communications Tell Us?

The fact that INTERSHOP Communications is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 3.9% on its capital. And unsurprisingly, like most companies trying to break into the black, INTERSHOP Communications is utilizing 25% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

Our Take On INTERSHOP Communications' ROCE

Overall, INTERSHOP Communications 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 total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

INTERSHOP Communications does have some risks though, and we've spotted 1 warning sign for INTERSHOP Communications that you might be interested in.

While INTERSHOP Communications may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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