Investors Met With Slowing Returns on Capital At InNature Berhad (KLSE:INNATURE)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating InNature Berhad (KLSE:INNATURE), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for InNature Berhad, this is the formula:

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

0.20 = RM30m ÷ (RM188m - RM37m) (Based on the trailing twelve months to December 2020).

Therefore, InNature Berhad has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 7.1% generated by the Specialty Retail industry.

View our latest analysis for InNature Berhad

In the above chart we have measured InNature Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for InNature Berhad.

So How Is InNature Berhad's ROCE Trending?

Things have been pretty stable at InNature Berhad, with its capital employed and returns on that capital staying somewhat the same for the last four years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if InNature Berhad doesn't end up being a multi-bagger in a few years time. This probably explains why InNature Berhad is paying out 50% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

The Key Takeaway

In a nutshell, InNature Berhad has been trudging along with the same returns from the same amount of capital over the last four years. Yet to long term shareholders the stock has gifted them an incredible 130% return in the last year, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a separate note, we've found 1 warning sign for InNature Berhad you'll probably want to know about.

While InNature Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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