The Returns On Capital At Innovana Thinklabs (NSE:INNOVANA) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Innovana Thinklabs (NSE:INNOVANA), it didn't seem to tick all of these boxes.

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)

0.12 = ₹125m ÷ (₹1.7b - ₹623m) (Based on the trailing twelve months to September 2022).

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

Check out the opportunities and risks within the IN Software industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Innovana Thinklabs' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Innovana Thinklabs, check out these free graphs here.

What Can We Tell From Innovana Thinklabs' ROCE Trend?

On the surface, the trend of ROCE at Innovana Thinklabs doesn't inspire confidence. Over the last five years, returns on capital have decreased to 12% from 53% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Innovana Thinklabs' ROCE

In summary, we're somewhat concerned by Innovana Thinklabs' diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 308%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know more about Innovana Thinklabs, we've spotted 4 warning signs, and 1 of them is significant.

While Innovana Thinklabs 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.

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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.