Enagás' (BME:ENG) Returns On Capital Not Reflecting Well On The Business

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. Having said that, after a brief look, Enagás (BME:ENG) we aren't filled with optimism, but let's investigate further.

We've discovered 2 warning signs about Enagás. View them for free.

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. The formula for this calculation on Enagás is:

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

0.047 = €288m ÷ (€7.5b - €1.4b) (Based on the trailing twelve months to March 2025).

Therefore, Enagás has an ROCE of 4.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.4%.

See our latest analysis for Enagás

Above you can see how the current ROCE for Enagás compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Enagás .

What Can We Tell From Enagás' ROCE Trend?

The trend of returns that Enagás is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 4.7% we see today. On top of that, the business is utilizing 27% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 18%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 4.7%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line On Enagás' ROCE

To see Enagás reducing the capital employed in the business in tandem with diminishing returns, is concerning. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Enagás (of which 1 is concerning!) that you should know about.

While Enagás 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.