Here's What's Concerning About ISP Global's (HKG:8487) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at ISP Global (HKG:8487) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. Analysts use this formula to calculate it for ISP Global:

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

0.0037 = S$60k ÷ (S$23m - S$6.3m) (Based on the trailing twelve months to March 2021).

So, ISP Global has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 7.0%.

Check out our latest analysis for ISP Global

Historical performance is a great place to start when researching a stock so above you can see the gauge for ISP Global's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of ISP Global, check out these free graphs here.

What Can We Tell From ISP Global's ROCE Trend?

In terms of ISP Global's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 0.4% from 19% four years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, ISP Global's current liabilities have increased over the last four years to 28% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line On ISP Global's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that ISP Global is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 58% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we found 3 warning signs for ISP Global (1 makes us a bit uncomfortable) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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