Will Innovatec's (BIT:INC) Growth In ROCE Persist?

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Innovatec (BIT:INC) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

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 Innovatec is:

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

0.15 = €3.3m ÷ (€38m - €17m) (Based on the trailing twelve months to June 2020).

So, Innovatec has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 10% generated by the Electrical industry.

See our latest analysis for Innovatec

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

How Are Returns Trending?

It's great to see that Innovatec has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 15% on their capital employed. In regards to capital employed, Innovatec is using 22% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Innovatec could be selling under-performing assets since the ROCE is improving.

Another thing to note, Innovatec has a high ratio of current liabilities to total assets of 44%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

From what we've seen above, Innovatec has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has only returned 14% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

If you want to know some of the risks facing Innovatec we've found 5 warning signs (1 is concerning!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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