Some Investors May Be Worried About Genesis IT's (NGM:GENE) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Genesis IT (NGM:GENE), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Genesis IT is:

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

0.12 = kr16m ÷ (kr155m - kr12m) (Based on the trailing twelve months to March 2021).

So, Genesis IT has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Software industry average of 11%.

See our latest analysis for Genesis IT

Historical performance is a great place to start when researching a stock so above you can see the gauge for Genesis IT's ROCE against it's prior returns. If you'd like to look at how Genesis IT 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

On the surface, the trend of ROCE at Genesis IT doesn't inspire confidence. To be more specific, ROCE has fallen from 21% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Genesis IT has decreased its current liabilities to 7.8% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Genesis IT's ROCE

We're a bit apprehensive about Genesis IT because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 4.4% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Genesis IT does have some risks though, and we've spotted 3 warning signs for Genesis IT that you might be interested in.

While Genesis IT may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.
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