Invibes Advertising (EPA: ALINV) could have difficulty using its capital efficiently

If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should watch out for. A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in line with growth amount capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a dialing machine. That said, from the first glance at Invibe advertising (EPA: ALINV) We’re not jumping from our chairs on the yield trend, but taking a closer look.

Understanding Return on Capital Employed (ROCE)

If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. The formula for this calculation on Invibes Advertising is:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.049 = 527 K € ÷ (18 M € – 7.7 M €) (Based on the last twelve months up to December 2020).

Thereby, Invibes Advertising has a ROCE of 4.9%. In absolute terms, this is a low return and it is also below the media industry average of 12%.

Discover our latest analysis for Invibes Advertising

ENXTPA: ALINV Review of the capital employed October 15, 2021

In the graph above, we’ve measured Invibes Advertising’s past ROCE against past performance, but the future is arguably more important. If you want, you can view the analysts’ forecasts covering Invibes Advertising here for free.

The ROCE trend

We weren’t thrilled with the trend as Invibes Advertising’s ROCE declined 62% over the past five years, while the company employed 1,475% more capital. That being said, Invibes Advertising raised capital ahead of the release of its latest results, which may partly explain the increase in capital employed. It is unlikely that all funds raised have been used yet. As a result, Invibes Advertising may not have received a full period of revenue contribution from it.

On a related note, Invibes Advertising reduced its current liabilities to 42% of total assets. This could partly explain the drop in ROCE. In effect, this means that their suppliers or short-term creditors fund the business less, which reduces some elements of risk. Some argue that this reduces the company’s efficiency in generating ROCE since it now finances more of the operations with its own money. Either way, they’re still at a fairly high level, so we would like to see them drop further if possible.

Invibes Advertising’s ROCE result

Although returns have fallen for Invibes Advertising lately, we are encouraged to see that sales are increasing and the company is reinvesting in its operations. And long-term investors should be optimistic about the future, as the stock has brought shareholders a whopping 281% over the past five years. So if these growth trends continue, we would be optimistic about the future of the title.

On a final note, we found 6 warning signs for Invibes Advertising (2 are potentially serious) you need to be aware of.

If you want to look for solid businesses with great income, check out this free list of companies with good balance sheets and impressive returns on equity.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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