Stock Analysis

Returns On Capital Signal Tricky Times Ahead For Invibes Advertising (EPA:ALINV)

ENXTPA:ALINV
Source: Shutterstock

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 investigating Invibes Advertising (EPA:ALINV), we don't think it's current trends fit the mold of a multi-bagger.

What is 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 Invibes Advertising:

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

0.049 = €527k ÷ (€18m - €7.7m) (Based on the trailing twelve months to December 2020).

So, Invibes Advertising has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Media industry average of 9.8%.

View our latest analysis for Invibes Advertising

roce
ENXTPA:ALINV Return on Capital Employed June 1st 2021

In the above chart we have measured Invibes Advertising's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Invibes Advertising.

What Can We Tell From Invibes Advertising's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 13% five years ago, while capital employed has grown 1,475%. Usually this isn't ideal, but given Invibes Advertising conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Invibes Advertising's earnings and if they change as a result from the capital raise.

On a related note, Invibes Advertising has decreased its current liabilities to 42% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line On Invibes Advertising's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Invibes Advertising is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 112% to shareholders in the last three years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing: We've identified 5 warning signs with Invibes Advertising (at least 2 which are a bit concerning) , and understanding these would certainly be useful.

While Invibes Advertising may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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