Returns On Capital Signal Difficult Times Ahead For ENENSYS Technologies (EPA:ALNN6)

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. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at ENENSYS Technologies (EPA:ALNN6), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for ENENSYS Technologies, this is the formula:

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).

Therefore, ENENSYS Technologies has an ROCE of 7.8%. On its own that's a low return, but compared to the average of 2.7% generated by the Communications industry, it's much better.

View our latest analysis for ENENSYS Technologies

Above you can see how the current ROCE for ENENSYS Technologies 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 ENENSYS Technologies here for free.

What Does the ROCE Trend For ENENSYS Technologies Tell Us?

In terms of ENENSYS Technologies' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 20% 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect ENENSYS Technologies to turn into a multi-bagger.

Our Take On ENENSYS Technologies' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. We expect this has contributed to the stock plummeting 84% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about ENENSYS Technologies, we've spotted 6 warning signs, and 5 of them are concerning.

While ENENSYS Technologies 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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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.