Capital Allocation Trends At Esval (SNSE:ESVAL-C) Aren't Ideal

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Esval (SNSE:ESVAL-C), we've spotted some signs that it could be struggling, so let's investigate.

What is 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 Esval, this is the formula:

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

0.039 = CL$41b ÷ (CL$1.1t - CL$82b) (Based on the trailing twelve months to December 2020).

Thus, Esval has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 8.9%.

Check out our latest analysis for Esval

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Esval, check out these free graphs here.

What Does the ROCE Trend For Esval Tell Us?

There is reason to be cautious about Esval, given the returns are trending downwards. To be more specific, the ROCE was 5.3% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Esval 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. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Esval, we've spotted 4 warning signs, and 2 of them don't sit too well with us.

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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