EXEL Industries (EPA:EXE) Has Some Difficulty Using Its Capital Effectively

When researching a stock for investment, what can tell us that the company is 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within EXEL Industries (EPA:EXE), we weren't too hopeful.

What is 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. The formula for this calculation on EXEL Industries is:

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

0.079 = €35m ÷ (€765m - €318m) (Based on the trailing twelve months to September 2020).

Thus, EXEL Industries has an ROCE of 7.9%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 3.2%.

Check out our latest analysis for EXEL Industries

Above you can see how the current ROCE for EXEL Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering EXEL Industries here for free.

How Are Returns Trending?

In terms of EXEL Industries' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 12%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. If these trends continue, we wouldn't expect EXEL Industries to turn into a multi-bagger.

Another thing to note, EXEL Industries has a high ratio of current liabilities to total assets of 42%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, it's unfortunate that EXEL Industries is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 11% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to continue researching EXEL Industries, you might be interested to know about the 1 warning sign that our analysis has discovered.

While EXEL Industries may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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