ESI Group's (EPA:ESI) Returns On Capital Not Reflecting Well On The Business

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within ESI Group (EPA:ESI), we weren't too hopeful.

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 ESI Group, this is the formula:

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

0.026 = €3.9m ÷ (€216m - €65m) (Based on the trailing twelve months to December 2020).

So, ESI Group has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Software industry average of 10%.

View our latest analysis for ESI Group

Above you can see how the current ROCE for ESI Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for ESI Group.

What Does the ROCE Trend For ESI Group Tell Us?

There is reason to be cautious about ESI Group, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 7.9% that they were earning five years ago. 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. If these trends continue, we wouldn't expect ESI Group to turn into a multi-bagger.

The Bottom Line On ESI Group's ROCE

In summary, it's unfortunate that ESI Group is generating lower returns from the same amount of capital. However the stock has delivered a 91% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing, we've spotted 1 warning sign facing ESI Group that you might find interesting.

While ESI Group 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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