Energiedienst Holding's (VTX:EDHN) Returns On Capital Tell Us There Is Reason To Feel Uneasy

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Energiedienst Holding (VTX:EDHN), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Energiedienst Holding, this is the formula:

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

0.033 = €40m ÷ (€1.5b - €253m) (Based on the trailing twelve months to December 2020).

So, Energiedienst Holding has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 6.6%.

Check out our latest analysis for Energiedienst Holding

Above you can see how the current ROCE for Energiedienst Holding 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 Energiedienst Holding.

What Does the ROCE Trend For Energiedienst Holding Tell Us?

We are a bit worried about the trend of returns on capital at Energiedienst Holding. To be more specific, the ROCE was 4.3% 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 Energiedienst Holding becoming one if things continue as they have.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 84% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know about the risks facing Energiedienst Holding, we've discovered 1 warning sign that you should be aware of.

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

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This article by Simply Wall St is general in nature. 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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