Is Energoinstal (WSE:ENI) Struggling?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Energoinstal (WSE:ENI) we aren't filled with optimism, but let's investigate further.

Understanding 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 Energoinstal is:

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

0.052 = zł3.7m ÷ (zł103m - zł31m) (Based on the trailing twelve months to September 2020).

Thus, Energoinstal has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 7.9%.

Check out our latest analysis for Energoinstal

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Energoinstal 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 Energoinstal Tell Us?

The trend of returns that Energoinstal is generating are raising some concerns. To be more specific, today's ROCE was 12% five years ago but has since fallen to 5.2%. On top of that, the business is utilizing 66% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a side note, Energoinstal has done well to pay down its current liabilities to 30% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

Our Take On Energoinstal's ROCE

To see Energoinstal reducing the capital employed in the business in tandem with diminishing returns, is concerning. Unsurprisingly then, the stock has dived 91% over the last five years, so investors are recognizing these changes and don't like the company's prospects. 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 2 warning signs for Energoinstal you'll probably want to know about.

While Energoinstal 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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