Here’s What’s Happening With Returns At 3i Infotech (NSE:3IINFOTECH)

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at 3i Infotech (NSE:3IINFOTECH) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for 3i Infotech:

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

0.14 = ₹1.7b ÷ (₹16b - ₹3.2b) (Based on the trailing twelve months to December 2020).

Thus, 3i Infotech has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 12% generated by the Software industry.

See our latest analysis for 3i Infotech

Historical performance is a great place to start when researching a stock so above you can see the gauge for 3i Infotech's ROCE against it's prior returns. If you'd like to look at how 3i Infotech has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For 3i Infotech Tell Us?

Shareholders will be relieved that 3i Infotech has broken into profitability. The company now earns 14% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by 3i Infotech has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 21%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From 3i Infotech's ROCE

To bring it all together, 3i Infotech has done well to increase the returns it's generating from its capital employed. And with a respectable 53% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

3i Infotech does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

While 3i Infotech 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 decide to trade 3i Infotech, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all 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.