Stock Analysis

What Do The Returns On Capital At Insimbi Industrial Holdings (JSE:ISB) Tell Us?

  •  Updated
JSE:ISB
Source: Shutterstock

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Insimbi Industrial Holdings (JSE:ISB), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.088 = R78m ÷ (R1.4b - R547m) (Based on the trailing twelve months to February 2020).

Therefore, Insimbi Industrial Holdings has an ROCE of 8.8%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 11%.

Check out our latest analysis for Insimbi Industrial Holdings

roce
JSE:ISB Return on Capital Employed November 24th 2020

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Insimbi Industrial Holdings, check out these free graphs here.

What Does the ROCE Trend For Insimbi Industrial Holdings Tell Us?

On the surface, the trend of ROCE at Insimbi Industrial Holdings doesn't inspire confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 8.8%. However it looks like Insimbi Industrial Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Insimbi Industrial Holdings has decreased its current liabilities to 38% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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. And investors may be recognizing these trends since the stock has only returned a total of 4.0% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing: We've identified 4 warning signs with Insimbi Industrial Holdings (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

If you decide to trade Insimbi Industrial Holdings, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted


Valuation is complex, but we're helping make it simple.

Find out whether Insimbi Industrial Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis