The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and looking to gauge the potential return on investment in Infinite Computer Solutions (India) Limited (NSE:INFINITE).
Purchasing Infinite Computer Solutions (India) gives you an ownership stake in the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Therefore, looking at how efficiently Infinite Computer Solutions (India) is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
Infinite Computer Solutions (India)’s Return On Capital Employed
When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. We’ll look at Infinite Computer Solutions (India)’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. INFINITE’s ROCE is calculated below:
ROCE Calculation for INFINITE
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = ₹1.7b ÷ (₹21b – ₹9.7b) = 14%
As you can see, INFINITE earned ₹13.8 from every ₹100 you invested over the previous twelve months. This makes Infinite Computer Solutions (India) slightly mediocre when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future, investor capital will be able to compound over time, but still may be missing out on some potential growth elsewhere.
Then why have investors invested?
Infinite Computer Solutions (India)’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Infinite Computer Solutions (India) is in an adverse position, but this can change if these factors improve. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Three years ago, INFINITE’s ROCE was 15%, which means the company’s capital returns have worsened. With this, the current earnings of ₹1.7b improved from ₹1.4b however capital employed has improved by a relatively larger volume due to an increase in total assets , which means that although earnings have increased, INFINITE requires more capital to produce each ₹1 of earnings.
INFINITE’s investors have experienced a downward trend in ROCE and it is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and management ability. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for INFINITE’s future growth? Take a look at our free research report of analyst consensus for INFINITE’s outlook.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Infinite Computer Solutions (India)’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.