Encavis (ETR:ECV) Has Some Way To Go To Become A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Encavis (ETR:ECV) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Encavis:

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

0.028 = €79m ÷ (€3.0b - €212m) (Based on the trailing twelve months to March 2021).

So, Encavis has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 3.6%.

Check out our latest analysis for Encavis

In the above chart we have measured Encavis' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

In terms of Encavis' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 2.8% for the last four years, and the capital employed within the business has risen 27% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

In conclusion, Encavis has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 160% gain to shareholders who have held over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Encavis does have some risks, we noticed 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Encavis 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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