Here's What's Concerning About Inapa - Investimentos Participações e Gestão's (ELI:INA) Returns On Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Inapa - Investimentos Participações e Gestão (ELI:INA), the trends above didn't look too great.

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. The formula for this calculation on Inapa - Investimentos Participações e Gestão is:

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

0.027 = €12m ÷ (€743m - €306m) (Based on the trailing twelve months to June 2021).

Therefore, Inapa - Investimentos Participações e Gestão has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 14%.

Check out our latest analysis for Inapa - Investimentos Participações e Gestão

Historical performance is a great place to start when researching a stock so above you can see the gauge for Inapa - Investimentos Participações e Gestão's ROCE against it's prior returns. If you'd like to look at how Inapa - Investimentos Participações e Gestão has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Inapa - Investimentos Participações e Gestão Tell Us?

There is reason to be cautious about Inapa - Investimentos Participações e Gestão, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 3.4% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Inapa - Investimentos Participações e Gestão becoming one if things continue as they have.

On a side note, Inapa - Investimentos Participações e Gestão's current liabilities have increased over the last five years to 41% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. This could explain why the stock has sunk a total of 80% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Inapa - Investimentos Participações e Gestão (of which 1 is a bit concerning!) that you should know about.

While Inapa - Investimentos Participações e Gestão 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.