Be Wary Of IntraSoft Technologies (NSE:ISFT) And Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think IntraSoft Technologies (NSE:ISFT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. To calculate this metric for IntraSoft Technologies, this is the formula:

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

0.041 = ₹128m ÷ (₹3.5b - ₹358m) (Based on the trailing twelve months to September 2022).

Therefore, IntraSoft Technologies has an ROCE of 4.1%. On its own that's a low return, but compared to the average of 3.2% generated by the Online Retail industry, it's much better.

Check out our latest analysis for IntraSoft Technologies

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

What Can We Tell From IntraSoft Technologies' ROCE Trend?

On the surface, the trend of ROCE at IntraSoft Technologies doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.1% from 9.0% five years ago. However it looks like IntraSoft Technologies might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, IntraSoft Technologies has decreased its current liabilities to 10% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

To conclude, we've found that IntraSoft Technologies is reinvesting in the business, but returns have been falling. Moreover, since the stock has crumbled 81% over the last five years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think IntraSoft Technologies has the makings of a multi-bagger.

Like most companies, IntraSoft Technologies does come with some risks, and we've found 4 warning signs that 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. 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.