Some Investors May Be Worried About Enertronica Santerno's (BIT:ENT) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Enertronica Santerno (BIT:ENT), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Enertronica Santerno, this is the formula:

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

0.004 = €121k ÷ (€84m - €54m) (Based on the trailing twelve months to December 2020).

Therefore, Enertronica Santerno has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Electrical industry average of 11%.

See our latest analysis for Enertronica Santerno

Historical performance is a great place to start when researching a stock so above you can see the gauge for Enertronica Santerno's ROCE against it's prior returns. If you'd like to look at how Enertronica Santerno has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Enertronica Santerno Tell Us?

On the surface, the trend of ROCE at Enertronica Santerno doesn't inspire confidence. Around five years ago the returns on capital were 45%, but since then they've fallen to 0.4%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Enertronica Santerno has decreased its current liabilities to 64% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

What We Can Learn From Enertronica Santerno's ROCE

We're a bit apprehensive about Enertronica Santerno because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Unsurprisingly then, the stock has dived 79% 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.

Enertronica Santerno does have some risks though, and we've spotted 4 warning signs for Enertronica Santerno that you might be interested in.

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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