Returns On Capital At INTERSHOP Communications (ETR:ISHA) Have Hit The Brakes

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at INTERSHOP Communications (ETR:ISHA), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for INTERSHOP Communications:

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

0.017 = €537k ÷ (€44m - €13m) (Based on the trailing twelve months to March 2022).

Thus, INTERSHOP Communications has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Software industry average of 17%.

Check out 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 to see what analysts are forecasting going forward, you should check out our free report for INTERSHOP Communications.

What Does the ROCE Trend For INTERSHOP Communications Tell Us?

There are better returns on capital out there than what we're seeing at INTERSHOP Communications. The company has consistently earned 1.7% for the last five years, and the capital employed within the business has risen 63% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

Long story short, while INTERSHOP Communications has been reinvesting its capital, the returns that it's generating haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 25% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing INTERSHOP Communications, we've discovered 4 warning signs that you should be aware of.

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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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.