When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into InnoTek (SGX:M14), we weren't too upbeat about how things were going.

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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. To calculate this metric for InnoTek, this is the formula:

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

0.012 = S$2.3m ÷ (S$263m - S$77m) (Based on the trailing twelve months to December 2024).

Therefore, InnoTek has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 4.4%.

View 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're interested in investigating InnoTek's past further, check out this free graph covering InnoTek's past earnings, revenue and cash flow.

There is reason to be cautious about InnoTek, given the returns are trending downwards. To be more specific, the ROCE was 7.2% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on InnoTek becoming one if things continue as they have.

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 13% 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.