These Return Metrics Don't Make ENENSYS Technologies (EPA:ALNN6) Look Too Strong

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. So after we looked into ENENSYS Technologies (EPA:ALNN6), the trends above didn't look too great.

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. The formula for this calculation on ENENSYS Technologies is:

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

0.086 = €959k ÷ (€18m - €6.6m) (Based on the trailing twelve months to June 2022).

So, ENENSYS Technologies has an ROCE of 8.6%. In absolute terms, that's a low return, but it's much better than the Communications industry average of 5.6%.

See 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 Can We Tell From ENENSYS Technologies' ROCE Trend?

There is reason to be cautious about ENENSYS Technologies, given the returns are trending downwards. 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. 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.

On a side note, ENENSYS Technologies' current liabilities have increased over the last five years to 37% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 8.6%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From 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. And, the stock has remained flat over the last three years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a separate note, we've found 4 warning signs for ENENSYS Technologies you'll probably want to know about.

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.