What Can The Trends At Indra Sistemas (BME:IDR) Tell Us About Their Returns?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Speaking of which, we noticed some great changes in Indra Sistemas' (BME:IDR) returns on capital, so let's have a look.

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 Indra Sistemas, this is the formula:

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

0.034 = €87m ÷ (€4.3b - €1.7b) (Based on the trailing twelve months to September 2020).

Therefore, Indra Sistemas has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the IT industry average of 13%.

View our latest analysis for Indra Sistemas

Above you can see how the current ROCE for Indra Sistemas compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Indra Sistemas' ROCE Trend?

We're delighted to see that Indra Sistemas is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 3.4% on its capital. Not only that, but the company is utilizing 70% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Indra Sistemas has decreased current liabilities to 40% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Indra Sistemas has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

In Conclusion...

Overall, Indra Sistemas gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Indra Sistemas (of which 1 is potentially serious!) that you should know about.

While Indra Sistemas 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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