What Do The Returns On Capital At InVision (ETR:IVX) Tell Us?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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 InVision (ETR:IVX), it didn't seem to tick all of these boxes.

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 InVision:

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

0.055 = €1.1m ÷ (€23m - €4.1m) (Based on the trailing twelve months to September 2020).

So, InVision has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Software industry average of 13%.

Check out our latest analysis for InVision

Above you can see how the current ROCE for InVision 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 InVision.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at InVision doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.5% from 25% five years ago. However it looks like InVision might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On InVision's ROCE

To conclude, we've found that InVision is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 54% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know more about InVision, we've spotted 4 warning signs, and 3 of them are a bit unpleasant.

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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