Capital Allocation Trends At IMPOL SEVAL Valjaonica Aluminijuma a.d (BELEX:IMPL) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at IMPOL SEVAL Valjaonica Aluminijuma a.d (BELEX:IMPL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on IMPOL SEVAL Valjaonica Aluminijuma a.d is:

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

0.13 = дин1.2b ÷ (дин17b - дин7.3b) (Based on the trailing twelve months to December 2021).

So, IMPOL SEVAL Valjaonica Aluminijuma a.d has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Metals and Mining industry average of 14%.

See our latest analysis for IMPOL SEVAL Valjaonica Aluminijuma a.d

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 IMPOL SEVAL Valjaonica Aluminijuma a.d 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 IMPOL SEVAL Valjaonica Aluminijuma a.d Tell Us?

When we looked at the ROCE trend at IMPOL SEVAL Valjaonica Aluminijuma a.d, we didn't gain much confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 13%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, IMPOL SEVAL Valjaonica Aluminijuma a.d's current liabilities have increased over the last five years to 44% 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. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line

While returns have fallen for IMPOL SEVAL Valjaonica Aluminijuma a.d in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 100% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for IMPOL SEVAL Valjaonica Aluminijuma a.d (of which 1 makes us a bit uncomfortable!) that you should know about.

While IMPOL SEVAL Valjaonica Aluminijuma a.d 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.