Should We Be Excited About The Trends Of Returns At Compuage Infocom (NSE:COMPINFO)?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So while Compuage Infocom (NSE:COMPINFO) has a high ROCE right now, lets see what we can decipher from how returns are changing.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Compuage Infocom:

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

0.28 = ₹723m ÷ (₹10b - ₹7.5b) (Based on the trailing twelve months to September 2020).

Thus, Compuage Infocom has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Electronic industry average of 7.8%.

View our latest analysis for Compuage Infocom

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 Compuage Infocom's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Compuage Infocom's ROCE Trending?

In terms of Compuage Infocom's historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 54%, but they have dropped over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

On a related note, Compuage Infocom has decreased its current liabilities to 75% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line On Compuage Infocom's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Compuage Infocom 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 66% from where it was three years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Compuage Infocom, we've spotted 3 warning signs, and 1 of them shouldn't be ignored.

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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.
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