There's Been No Shortage Of Growth Recently For Infrea's (STO:INFREA) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Speaking of which, we noticed some great changes in Infrea's (STO:INFREA) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Infrea, this is the formula:

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

0.023 = kr21m ÷ (kr1.4b - kr459m) (Based on the trailing twelve months to September 2023).

So, Infrea has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Industrials industry average of 7.6%.

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 want to delve into the historical earnings, revenue and cash flow of Infrea, check out these free graphs here.

The Trend Of ROCE

We're delighted to see that Infrea is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 2.3% on its capital. In addition to that, Infrea is employing 83% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Bottom Line

To the delight of most shareholders, Infrea has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 11% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know more about Infrea, we've spotted 5 warning signs, and 1 of them can't be ignored.

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.