Insimbi Industrial Holdings (JSE:ISB) Is Finding It Tricky To Allocate Its Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Insimbi Industrial Holdings (JSE:ISB), the trends above didn't look too great.

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

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)

0.048 = R41m ÷ (R1.6b - R699m) (Based on the trailing twelve months to August 2024).

So, Insimbi Industrial Holdings has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 11%.

View our latest analysis for Insimbi Industrial Holdings

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 Insimbi Industrial Holdings' past earnings, revenue and cash flow.

So How Is Insimbi Industrial Holdings' ROCE Trending?

We are a bit worried about the trend of returns on capital at Insimbi Industrial Holdings. About five years ago, returns on capital were 14%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Insimbi Industrial Holdings to turn into a multi-bagger.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 45%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 4.8%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

What We Can Learn From Insimbi Industrial Holdings' ROCE

In summary, it's unfortunate that Insimbi Industrial Holdings is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 29% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Insimbi Industrial Holdings (2 don't sit too well with us) you should be aware of.

While Insimbi Industrial 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.