The Returns On Capital At Inari Amertron Berhad (KLSE:INARI) Don't Inspire Confidence

By
Simply Wall St
Published
March 21, 2022
KLSE:INARI
Source: Shutterstock

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Inari Amertron Berhad (KLSE:INARI), it didn't seem to tick all of these boxes.

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

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 Inari Amertron Berhad:

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

0.15 = RM378m ÷ (RM2.8b - RM349m) (Based on the trailing twelve months to December 2021).

Thus, Inari Amertron Berhad has an ROCE of 15%. That's a pretty standard return and it's in line with the industry average of 15%.

View our latest analysis for Inari Amertron Berhad

roce
KLSE:INARI Return on Capital Employed March 21st 2022

Above you can see how the current ROCE for Inari Amertron Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Inari Amertron Berhad here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Inari Amertron Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 15% from 21% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Inari Amertron Berhad's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Inari Amertron Berhad is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 170% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know about the risks facing Inari Amertron Berhad, we've discovered 3 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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