Infrea (STO:INFREA) Is Looking To Continue Growing Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Infrea (STO:INFREA) and its trend of ROCE, we really liked what we saw.

What is 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 Infrea:

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

0.027 = kr15m ÷ (kr800m - kr245m) (Based on the trailing twelve months to March 2021).

Therefore, Infrea has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Industrials industry average of 9.3%.

View our latest analysis for Infrea

Historical performance is a great place to start when researching a stock so above you can see the gauge for Infrea's ROCE against it's prior returns. If you'd like to look at how Infrea has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Infrea's ROCE Trending?

The fact that Infrea is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 2.7% on its capital. In addition to that, Infrea is employing 12,984% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

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 31% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

In summary, it's great to see that Infrea has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 153% total return over the last three years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Infrea can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Infrea, we've discovered 2 warning signs that you should be aware of.

While Infrea 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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