Inapa - Investimentos Participações e Gestão (ELI:INA) Is Doing The Right Things To Multiply Its Share Price

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Inapa - Investimentos Participações e Gestão's (ELI:INA) returns on capital, so let's have a look.

Understanding 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. Analysts use this formula to calculate it for Inapa - Investimentos Participações e Gestão:

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

0.12 = €48m ÷ (€707m - €292m) (Based on the trailing twelve months to June 2022).

Thus, Inapa - Investimentos Participações e Gestão has an ROCE of 12%. In isolation, that's a pretty standard return but against the Trade Distributors industry average of 15%, it's not as good.

See 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're interested in investigating Inapa - Investimentos Participações e Gestão's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Inapa - Investimentos Participações e Gestão has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 338% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 41% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

In Conclusion...

To bring it all together, Inapa - Investimentos Participações e Gestão has done well to increase the returns it's generating from its capital employed. Given the stock has declined 60% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Like most companies, Inapa - Investimentos Participações e Gestão does come with some risks, and we've found 4 warning signs that you should be aware of.

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.