How Well Is Intracom Constructions Societe Anonyme Technical and Steel Constructions (ATH:INKAT) Allocating Its Capital?

By
Simply Wall St
Published
November 29, 2020

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Intracom Constructions Societe Anonyme Technical and Steel Constructions (ATH:INKAT) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What is it?

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 Intracom Constructions Societe Anonyme Technical and Steel Constructions, this is the formula:

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

0.038 = €3.7m ÷ (€291m - €195m) (Based on the trailing twelve months to June 2020).

So, Intracom Constructions Societe Anonyme Technical and Steel Constructions has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Construction industry average of 9.9%.

View our latest analysis for Intracom Constructions Societe Anonyme Technical and Steel Constructions

ATSE:INKAT Return on Capital Employed November 29th 2020

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

How Are Returns Trending?

In terms of Intracom Constructions Societe Anonyme Technical and Steel Constructions' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 10% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Intracom Constructions Societe Anonyme Technical and Steel Constructions to turn into a multi-bagger.

On a separate but related note, it's important to know that Intracom Constructions Societe Anonyme Technical and Steel Constructions has a current liabilities to total assets ratio of 67%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Intracom Constructions Societe Anonyme Technical and Steel Constructions' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Yet despite these poor fundamentals, the stock has gained a huge 139% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing, we've spotted 1 warning sign facing Intracom Constructions Societe Anonyme Technical and Steel Constructions that you might find interesting.

While Intracom Constructions Societe Anonyme Technical and Steel Constructions 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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