If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Intracom Holdings' (ATH:INTRK) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
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 Intracom Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.054 = €20m ÷ (€720m - €340m) (Based on the trailing twelve months to June 2020).
So, Intracom Holdings has an ROCE of 5.4%. Even though it's in line with the industry average of 5.4%, it's still a low return by itself.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Intracom Holdings' ROCE against it's prior returns. If you'd like to look at how Intracom Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Intracom Holdings' ROCE Trend?
Intracom Holdings is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 30% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.Another thing to note, Intracom Holdings has a high ratio of current liabilities to total assets of 47%. 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.
The Key Takeaway
To bring it all together, Intracom Holdings has done well to increase the returns it's generating from its capital employed. And with a respectable 62% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Intracom Holdings does have some risks, we noticed 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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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