Inapa - Investimentos Participações e Gestão's (ELI:INA) Returns Have Hit A Wall

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Inapa - Investimentos Participações e Gestão (ELI:INA), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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 Inapa - Investimentos Participações e Gestão, this is the formula:

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

0.023 = €9.1m ÷ (€617m - €217m) (Based on the trailing twelve months to December 2023).

Thus, Inapa - Investimentos Participações e Gestão has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 11%.

View 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 Inapa - Investimentos Participações e Gestão's past earnings, revenue and cash flow.

What Can We Tell From Inapa - Investimentos Participações e Gestão's ROCE Trend?

Over the past five years, Inapa - Investimentos Participações e Gestão's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Inapa - Investimentos Participações e Gestão doesn't end up being a multi-bagger in a few years time.

The Key Takeaway

In a nutshell, Inapa - Investimentos Participações e Gestão has been trudging along with the same returns from the same amount of capital over the last five years. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 94% over the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing to note, we've identified 2 warning signs with Inapa - Investimentos Participações e Gestão and understanding them should be part of your investment process.

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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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.