Slowing Rates Of Return At Inter Gamma Investment (TLV:INTR) Leave Little Room For Excitement

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Inter Gamma Investment (TLV:INTR) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Inter Gamma Investment is:

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

0.10 = ₪4.7m ÷ (₪56m - ₪10m) (Based on the trailing twelve months to June 2021).

Therefore, Inter Gamma Investment has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 7.5% it's much better.

View our latest analysis for Inter Gamma Investment

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

How Are Returns Trending?

Over the past five years, Inter Gamma Investment's ROCE has remained relatively flat while the business is using 88% less capital than before. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. You could assume that if this continues, the business will be smaller in a few year time, so probably not a multi-bagger.

On a side note, Inter Gamma Investment has done well to reduce current liabilities to 18% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

In summary, Inter Gamma Investment isn't reinvesting funds back into the business and returns aren't growing. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 195% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Inter Gamma Investment does have some risks though, and we've spotted 1 warning sign for Inter Gamma Investment that you might be interested in.

While Inter Gamma Investment isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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