Be Wary Of Enauta Participações (BVMF:ENAT3) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Enauta Participações (BVMF:ENAT3) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Enauta Participações:

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

0.038 = R$258m ÷ (R$8.2b - R$1.4b) (Based on the trailing twelve months to September 2023).

Therefore, Enauta Participações has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 16%.

View our latest analysis for Enauta Participações

Above you can see how the current ROCE for Enauta Participações compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Enauta Participações here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Enauta Participações, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.9% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

What We Can Learn From Enauta Participações' ROCE

In summary, we're somewhat concerned by Enauta Participações' diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 131% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Enauta Participações does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While Enauta Participações isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.