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

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at IntraSoft Technologies (NSE:ISFT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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. 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)

0.038 = ₹112m ÷ (₹3.3b - ₹382m) (Based on the trailing twelve months to March 2022).

So, IntraSoft Technologies has an ROCE of 3.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.0%.

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 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?

When we looked at the ROCE trend at IntraSoft Technologies, we didn't gain much confidence. To be more specific, ROCE has fallen from 10% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for IntraSoft Technologies have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 45% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

IntraSoft Technologies does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

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.