Investors Could Be Concerned With EVZ's (ASX:EVZ) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Although, when we looked at EVZ (ASX:EVZ), it didn't seem to tick all of these boxes.

Understanding 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. To calculate this metric for EVZ, this is the formula:

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

0.061 = AU$2.3m ÷ (AU$61m - AU$23m) (Based on the trailing twelve months to December 2023).

So, EVZ has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Construction industry average of 15%.

View our latest analysis for EVZ

Historical performance is a great place to start when researching a stock so above you can see the gauge for EVZ's ROCE against it's prior returns. If you'd like to look at how EVZ has performed in the past in other metrics, you can view this free graph of EVZ's past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at EVZ doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.1% from 10% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On EVZ's ROCE

While returns have fallen for EVZ in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 36% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing to note, we've identified 1 warning sign with EVZ and understanding this should be part of your investment process.

While EVZ 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.