Returns On Capital Are Showing Encouraging Signs At Instructure Holdings (NYSE:INST)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Instructure Holdings (NYSE:INST) and its trend of ROCE, we really liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Instructure Holdings, this is the formula:

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

0.0081 = US$15m ÷ (US$2.2b - US$385m) (Based on the trailing twelve months to September 2023).

Thus, Instructure Holdings has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Software industry average of 7.9%.

See our latest analysis for Instructure Holdings

In the above chart we have measured Instructure Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Instructure Holdings here for free.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Instructure Holdings is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.8% on its capital. In addition to that, Instructure Holdings is employing 1,203% 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.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 18%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Instructure Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Instructure Holdings' ROCE

Overall, Instructure Holdings gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Considering the stock has delivered 4.2% to its stockholders over the last year, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

On a separate note, we've found 1 warning sign for Instructure Holdings you'll probably want to know about.

While Instructure Holdings 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.