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What are the early trends we should look for to identify a stock that could 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Inseego (NASDAQ:INSG) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Inseego is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = US$2.6m ÷ (US$100m - US$63m) (Based on the trailing twelve months to December 2024).
Therefore, Inseego has an ROCE of 7.2%. In absolute terms, that's a low return but it's around the Communications industry average of 9.0%.
See our latest analysis for Inseego
Above you can see how the current ROCE for Inseego compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Inseego for free.
What Can We Tell From Inseego's ROCE Trend?
It's great to see that Inseego has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 7.2% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 69% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Inseego could be selling under-performing assets since the ROCE is improving.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 63% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
The Bottom Line
In the end, Inseego has proven it's capital allocation skills are good with those higher returns from less amount of capital. However the stock is down a substantial 94% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.