If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Innuovo Technology (SZSE:000795), we don't think it's current trends fit the mold of a multi-bagger.
What Is 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. Analysts use this formula to calculate it for Innuovo Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = CN¥54m ÷ (CN¥5.1b - CN¥2.4b) (Based on the trailing twelve months to September 2023).
So, Innuovo Technology has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.2%.
See our latest analysis for Innuovo Technology
Historical performance is a great place to start when researching a stock so above you can see the gauge for Innuovo Technology's ROCE against it's prior returns. If you're interested in investigating Innuovo Technology's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Innuovo Technology's ROCE Trend?
On the surface, the trend of ROCE at Innuovo Technology doesn't inspire confidence. To be more specific, ROCE has fallen from 7.5% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 46%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 2.0%. 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.
Our Take On Innuovo Technology's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Innuovo Technology have fallen, meanwhile the business is employing more capital than it was five years ago. Despite the concerning underlying trends, the stock has actually gained 32% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
On a final note, we've found 2 warning signs for Innuovo Technology that we think you should be aware of.
While Innuovo Technology 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.
