This article is intended for those of you who are at the beginning of your investing journey and looking to gauge the potential return on investment in Intralot SA Integrated Lottery Systems and Services (ATH:INLOT).
Intralot Integrated Lottery Systems and Services stock represents an ownership share in the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Therefore, looking at how efficiently Intralot Integrated Lottery Systems and Services is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
Intralot Integrated Lottery Systems and Services’s Return On Capital Employed
When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. We’ll look at Intralot Integrated Lottery Systems and Services’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. Take a look at the formula box beneath:
ROCE Calculation for INLOT
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = €27m ÷ (€987m – €151m) = 3.2%
The calculation above shows that INLOT’s earnings were 3.2% of capital employed. This makes Intralot Integrated Lottery Systems and Services disappointing when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future, investor capital may be able to compound over time, but not to standard that investors should be aiming for.
Why is this the case?
Although Intralot Integrated Lottery Systems and Services is in an unfavourable position, you should know that this could change if the company is able to increase earnings on the same capital base or find new efficiencies that require less capital to produce earnings. Because of this, it is important to look beyond the final value of INLOT’s ROCE and understand what is happening to the individual components. If you go back three years, you’ll find that INLOT’s ROCE has decreased from 4.2%. The movement in the earnings variable over this time shows a fall from €43m to €27m whilst capital employed also decreased but to a smaller extent, which means the company’s ROCE has deteriorated due to a decline in earnings relative to the capital invested in the business.
INLOT’s investors have experienced a downward trend in ROCE and it is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. However, it is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and valuation. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for INLOT’s future growth? Take a look at our free research report of analyst consensus for INLOT’s outlook.
- Valuation: What is INLOT worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether INLOT is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.