Returns At Informatica (NYSE:INFA) Are On The Way Up

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Informatica's (NYSE:INFA) returns on capital, so let's have a look.

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Understanding 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. The formula for this calculation on Informatica is:

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

0.033 = US$140m ÷ (US$5.3b - US$1.1b) (Based on the trailing twelve months to December 2024).

Thus, Informatica has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Software industry average of 9.7%.

Check out our latest analysis for Informatica

In the above chart we have measured Informatica's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Informatica .

How Are Returns Trending?

Shareholders will be relieved that Informatica has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 3.3% on its capital. While returns have increased, the amount of capital employed by Informatica has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

What We Can Learn From Informatica's ROCE

To bring it all together, Informatica has done well to increase the returns it's generating from its capital employed. Since the total return from the stock has been almost flat over the last three years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.

While Informatica looks impressive, no company is worth an infinite price. The intrinsic value infographic for INFA helps visualize whether it is currently trading for a fair price.

While Informatica 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.