Innovana Thinklabs (NSE:INNOVANA) May Have Issues Allocating Its Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Looking at Innovana Thinklabs (NSE:INNOVANA), it does have a high ROCE right now, but lets see how returns are trending.

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 Innovana Thinklabs, this is the formula:

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

0.23 = ₹229m ÷ (₹1.6b - ₹645m) (Based on the trailing twelve months to March 2022).

Therefore, Innovana Thinklabs has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Software industry average of 8.5%.

View our latest analysis for Innovana Thinklabs

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Innovana Thinklabs' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Innovana Thinklabs' ROCE Trending?

In terms of Innovana Thinklabs' historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 29% where it was five years ago. However it looks like Innovana Thinklabs 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

To conclude, we've found that Innovana Thinklabs is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 251% gain to shareholders who have held over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we found 3 warning signs for Innovana Thinklabs (1 shouldn't be ignored) you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.