Stock Analysis

Insimbi Industrial Holdings (JSE:ISB) Could Be Struggling To Allocate Capital

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JSE:ISB
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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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Insimbi Industrial Holdings (JSE:ISB), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Insimbi Industrial Holdings is:

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

0.051 = R45m ÷ (R1.3b - R460m) (Based on the trailing twelve months to August 2020).

Therefore, Insimbi Industrial Holdings has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 13%.

View our latest analysis for Insimbi Industrial Holdings

roce
JSE:ISB Return on Capital Employed May 18th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Insimbi Industrial Holdings' ROCE against it's prior returns. If you'd like to look at how Insimbi Industrial Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Insimbi Industrial Holdings doesn't inspire confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 5.1%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Insimbi Industrial Holdings has decreased its current liabilities to 34% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

To conclude, we've found that Insimbi Industrial Holdings is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Insimbi Industrial Holdings does have some risks, we noticed 5 warning signs (and 2 which can't be ignored) we think you should know about.

While Insimbi Industrial Holdings 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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