Capital Allocation Trends At Inclam (BME:INC) Aren't Ideal

By
Simply Wall St
Published
March 23, 2021
BME:INC
Source: Shutterstock

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after briefly looking over the numbers, we don't think Inclam (BME:INC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Inclam, this is the formula:

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

0.13 = €2.3m ÷ (€47m - €30m) (Based on the trailing twelve months to December 2019).

Therefore, Inclam has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 9.5% it's much better.

View our latest analysis for Inclam

roce
BME:INC Return on Capital Employed March 24th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Inclam's ROCE against it's prior returns. If you're interested in investigating Inclam's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Inclam Tell Us?

In terms of Inclam's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 13% from 23% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Another thing to note, Inclam has a high ratio of current liabilities to total assets of 63%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, we're somewhat concerned by Inclam's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 14% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Inclam we've found 5 warning signs (3 are a bit concerning!) that you should be aware of before investing here.

While Inclam 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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This article by Simply Wall St is general in nature. 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.
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