There Are Reasons To Feel Uneasy About Compuage Infocom's (NSE:COMPINFO) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Looking at Compuage Infocom (NSE:COMPINFO), it does have a high ROCE right now, but lets see how returns are trending.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Compuage Infocom is:

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 December 2020).

Thus, Compuage Infocom has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 7.0% earned by companies in a similar industry.

View our latest analysis for Compuage Infocom

Historical performance is a great place to start when researching a stock so above you can see the gauge for Compuage Infocom's ROCE against it's prior returns. If you're interested in investigating Compuage Infocom's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Compuage Infocom, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 52%. 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.

On a side note, Compuage Infocom has done well to pay down its current liabilities to 75% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 75% is still pretty high, so those risks are still somewhat prevalent.

Our Take 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. Long term shareholders who've owned the stock over the last three years have experienced a 55% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Compuage Infocom does have some risks, we noticed 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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