INA-Industrija nafte d.d (ZGSE:INA) Could Be At Risk Of Shrinking As A Company

What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, INA-Industrija nafte d.d (ZGSE:INA) we aren't filled with optimism, but let's investigate further.

Understanding 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. The formula for this calculation on INA-Industrija nafte d.d is:

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

0.056 = €133m ÷ (€3.3b - €970m) (Based on the trailing twelve months to September 2023).

Thus, INA-Industrija nafte d.d has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 14%.

See our latest analysis for INA-Industrija nafte d.d

Historical performance is a great place to start when researching a stock so above you can see the gauge for INA-Industrija nafte d.d's ROCE against it's prior returns. If you're interested in investigating INA-Industrija nafte d.d's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is INA-Industrija nafte d.d's ROCE Trending?

In terms of INA-Industrija nafte d.d's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 10% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on INA-Industrija nafte d.d becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that INA-Industrija nafte d.d is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 35% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing to note, we've identified 3 warning signs with INA-Industrija nafte d.d and understanding these should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.