Returns On Capital At Informatika a.d (BELEX:INFM) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think Informatika a.d (BELEX:INFM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Our free stock report includes 4 warning signs investors should be aware of before investing in Informatika a.d. Read for free now.

What Is 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 Informatika a.d, this is the formula:

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

0.067 = дин107m ÷ (дин4.3b - дин2.7b) (Based on the trailing twelve months to December 2024).

Thus, Informatika a.d has an ROCE of 6.7%. In absolute terms, that's a low return and it also under-performs the IT industry average of 14%.

Check out our latest analysis for Informatika 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 Informatika a.d has performed in the past in other metrics, you can view this free graph of Informatika a.d's past earnings, revenue and cash flow.

What Can We Tell From Informatika a.d's ROCE Trend?

On the surface, the trend of ROCE at Informatika a.d doesn't inspire confidence. To be more specific, ROCE has fallen from 10% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Informatika a.d's current liabilities have increased over the last five years to 63% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 6.7%. 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 Key Takeaway

In summary, we're somewhat concerned by Informatika a.d's diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 485% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Informatika a.d (of which 3 are concerning!) that you should know about.

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. 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.