Returns On Capital Are Showing Encouraging Signs At Infortrend Technology (TWSE:2495)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So on that note, Infortrend Technology (TWSE:2495) looks quite promising in regards to its trends of return on capital.

What Is 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. Analysts use this formula to calculate it for Infortrend Technology:

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

0.045 = NT$197m ÷ (NT$6.8b - NT$2.4b) (Based on the trailing twelve months to June 2024).

Therefore, Infortrend Technology has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Tech industry average of 11%.

Check out our latest analysis for Infortrend Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Infortrend Technology's ROCE against it's prior returns. If you're interested in investigating Infortrend Technology's past further, check out this free graph covering Infortrend Technology's past earnings, revenue and cash flow.

How Are Returns Trending?

While there are companies with higher returns on capital out there, we still find the trend at Infortrend Technology promising. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 278% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 35% 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 Bottom Line On Infortrend Technology's ROCE

In summary, we're delighted to see that Infortrend Technology has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 127% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, Infortrend Technology does come with some risks, and we've found 3 warning signs that you should be aware of.

While Infortrend Technology 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.