InterMail (CPH:IMAIL) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think InterMail (CPH:IMAIL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for InterMail, this is the formula:

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

0.10 = kr.10m ÷ (kr.139m - kr.35m) (Based on the trailing twelve months to March 2023).

Thus, InterMail has an ROCE of 10%. That's a pretty standard return and it's in line with the industry average of 10%.

View 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're interested in investigating InterMail's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is InterMail's ROCE Trending?

In terms of InterMail's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 10% from 33% five years ago. However it looks like InterMail 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 may take some time before the company starts to see any change in earnings from these investments.

On a related note, InterMail has decreased its current liabilities to 25% of total assets. Considering it used to be 83%, that's a huge drop in that ratio and it would explain the decline in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

To conclude, we've found that InterMail 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 60% 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 want to know some of the risks facing InterMail we've found 3 warning signs (2 are a bit concerning!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.