What Impresa - Sociedade Gestora de Participações Sociais' (ELI:IPR) Returns On Capital Can Tell Us

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Impresa - Sociedade Gestora de Participações Sociais (ELI:IPR) we aren't filled with optimism, but let's investigate further.

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 Impresa - Sociedade Gestora de Participações Sociais:

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

0.058 = €16m ÷ (€375m - €100m) (Based on the trailing twelve months to June 2020).

Thus, Impresa - Sociedade Gestora de Participações Sociais has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Media industry average of 9.2%.

Check out our latest analysis for Impresa - Sociedade Gestora de Participações Sociais

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 Impresa - Sociedade Gestora de Participações Sociais has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Impresa - Sociedade Gestora de Participações Sociais' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 7.5% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Impresa - Sociedade Gestora de Participações Sociais to turn into a multi-bagger.

Our Take On Impresa - Sociedade Gestora de Participações Sociais' ROCE

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. It should come as no surprise then that the stock has fallen 69% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Impresa - Sociedade Gestora de Participações Sociais we've found 3 warning signs (2 can't be ignored!) that you should be aware of before investing here.

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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This article by Simply Wall St is general in nature. 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.
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