Be Wary Of ENENSYS Technologies (EPA:ALNN6) And Its Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within ENENSYS Technologies (EPA:ALNN6), we weren't too hopeful.

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. The formula for this calculation on ENENSYS Technologies is:

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

0.078 = €892k ÷ (€17m - €5.9m) (Based on the trailing twelve months to December 2022).

So, ENENSYS Technologies has an ROCE of 7.8%. In absolute terms, that's a low return, but it's much better than the Communications industry average of 2.2%.

View our latest analysis for ENENSYS Technologies

In the above chart we have measured ENENSYS Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for ENENSYS Technologies.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at ENENSYS Technologies. To be more specific, the ROCE was 20% 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on ENENSYS Technologies becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that ENENSYS Technologies is generating lower returns from the same amount of capital. Unsurprisingly then, the stock has dived 81% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 6 warning signs we've spotted with ENENSYS Technologies (including 4 which are potentially serious) .

While ENENSYS Technologies 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. 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.