Here's What's Concerning About IntraSoft Technologies' (NSE:ISFT) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at IntraSoft Technologies (NSE:ISFT), it didn't seem to tick all of these boxes.

What is 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. Analysts use this formula to calculate it for IntraSoft Technologies:

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

0.0091 = ₹24m ÷ (₹3.0b - ₹318m) (Based on the trailing twelve months to December 2020).

Thus, IntraSoft Technologies has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Online Retail industry average of 1.7%.

See 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 want to delve into the historical earnings, revenue and cash flow of IntraSoft Technologies, check out these free graphs here.

What Can We Tell From IntraSoft Technologies' ROCE Trend?

On the surface, the trend of ROCE at IntraSoft Technologies doesn't inspire confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 0.9%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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 11% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

What We Can Learn From IntraSoft Technologies' ROCE

Bringing it all together, while we're somewhat encouraged by IntraSoft Technologies' reinvestment in its own business, we're aware that returns are shrinking. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 75% over the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing: We've identified 6 warning signs with IntraSoft Technologies (at least 2 which are potentially serious) , and understanding these would certainly be useful.

While IntraSoft Technologies may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

If you’re looking to trade IntraSoft Technologies, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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