We're Watching These Trends At essensys (LON:ESYS)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at essensys (LON:ESYS) and its ROCE trend, we weren't exactly thrilled.

What is 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. Analysts use this formula to calculate it for essensys:

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

0.0052 = UK£90k ÷ (UK£23m - UK£5.5m) (Based on the trailing twelve months to July 2020).

Therefore, essensys has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Software industry average of 7.5%.

Check out our latest analysis for essensys

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

What Does the ROCE Trend For essensys Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 3.5% four years ago, while capital employed has grown 223%. That being said, essensys raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with essensys' earnings and if they change as a result from the capital raise.

On a side note, essensys has done well to pay down its current liabilities to 24% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

To conclude, we've found that essensys is reinvesting in the business, but returns have been falling. Since the stock has declined 21% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think essensys has the makings of a multi-bagger.

If you want to continue researching essensys, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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