How Well Is Inapa - Investimentos Participações e Gestão (ELI:INA) Allocating Its Capital?

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Inapa - Investimentos Participações e Gestão (ELI:INA) we aren't filled with optimism, but let's investigate further.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.0097 = €4.2m ÷ (€737m - €301m) (Based on the trailing twelve months to June 2020).

So, Inapa - Investimentos Participações e Gestão has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 11%.

See our latest analysis for Inapa - Investimentos Participações e Gestão

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'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.

How Are Returns Trending?

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 4.0% 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Inapa - Investimentos Participações e Gestão to turn into a multi-bagger.

Another thing to note, Inapa - Investimentos Participações e Gestão has a high ratio of current liabilities to total assets of 41%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, it's unfortunate that Inapa - Investimentos Participações e Gestão is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 65% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 2 warning signs for Inapa - Investimentos Participações e Gestão (1 doesn't sit too well with us) you should be aware of.

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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