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There Are Reasons To Feel Uneasy About Inari Amertron Berhad's (KLSE:INARI) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Although, when we looked at Inari Amertron Berhad (KLSE:INARI), it didn't seem to tick all of these boxes.

What Is 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 Inari Amertron Berhad is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.14 = RM357m ÷ (RM2.8b - RM247m) (Based on the trailing twelve months to March 2023).

Therefore, Inari Amertron Berhad has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 12% generated by the Semiconductor industry.

Check out our latest analysis for Inari Amertron Berhad

roce
roce

Above you can see how the current ROCE for Inari Amertron Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Inari Amertron Berhad.

The Trend Of ROCE

On the surface, the trend of ROCE at Inari Amertron Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 14% from 28% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Inari Amertron Berhad has decreased its current liabilities to 8.7% 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 Bottom Line On Inari Amertron Berhad's ROCE

In summary, we're somewhat concerned by Inari Amertron Berhad's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 26% 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.

One more thing, we've spotted 1 warning sign facing Inari Amertron Berhad that you might find interesting.

While Inari Amertron Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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