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When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, InnoTek (SGX:M14) we aren't filled with optimism, but let's investigate further.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for InnoTek:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = S$4.0m ÷ (S$278m - S$92m) (Based on the trailing twelve months to June 2024).
Therefore, InnoTek has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 7.7%.
See our latest analysis for InnoTek
Historical performance is a great place to start when researching a stock so above you can see the gauge for InnoTek's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of InnoTek.
How Are Returns Trending?
In terms of InnoTek's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 12% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect InnoTek to turn into a multi-bagger.
The Bottom Line On InnoTek's ROCE
In summary, it's unfortunate that InnoTek is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 15% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
If you'd like to know more about InnoTek, we've spotted 4 warning signs, and 2 of them are concerning.