Here's What's Concerning About InterMail's (CPH:IMAIL) Returns On Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, InterMail (CPH:IMAIL) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for InterMail:

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

0.012 = kr.1.3m ÷ (kr.155m - kr.47m) (Based on the trailing twelve months to September 2020).

So, InterMail has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 9.5%.

See our latest analysis for InterMail

Historical performance is a great place to start when researching a stock so above you can see the gauge for InterMail's ROCE against it's prior returns. If you'd like to look at how InterMail has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The trend of returns that InterMail is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 1.2% we see today. In addition to that, InterMail is now employing 50% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Key Takeaway

To see InterMail reducing the capital employed in the business in tandem with diminishing returns, is concerning. Long term shareholders who've owned the stock over the last five years have experienced a 59% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know about the risks facing InterMail, we've discovered 1 warning sign that you should be aware of.

While InterMail isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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