Enjoy (SNSE:ENJOY) Has Some Difficulty Using Its Capital Effectively

What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Enjoy (SNSE:ENJOY), we weren't too upbeat about how things were going.

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. Analysts use this formula to calculate it for Enjoy:

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

0.0025 = CL$842m ÷ (CL$833b - CL$502b) (Based on the trailing twelve months to September 2024).

So, Enjoy has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 8.3%.

Check out our latest analysis for Enjoy

Historical performance is a great place to start when researching a stock so above you can see the gauge for Enjoy's ROCE against it's prior returns. If you're interested in investigating Enjoy's past further, check out this free graph covering Enjoy's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Enjoy's historical ROCE trend, it isn't fantastic. The company used to generate 3.8% on its capital five years ago but it has since fallen noticeably. In addition to that, Enjoy is now employing 37% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, Enjoy's current liabilities have increased over the last five years to 60% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Key Takeaway

To see Enjoy reducing the capital employed in the business in tandem with diminishing returns, is concerning. We expect this has contributed to the stock plummeting 98% during the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing Enjoy we've found 4 warning signs (3 are concerning!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.