Here's What's Concerning About Energoprojekt Holding a.d's (BELEX:ENHL) Returns On Capital

When researching a stock for investment, what can tell us that the company is in decline? 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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Energoprojekt Holding a.d (BELEX:ENHL) 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 Energoprojekt Holding a.d is:

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

0.019 = дин426m ÷ (дин39b - дин17b) (Based on the trailing twelve months to June 2020).

Thus, Energoprojekt Holding a.d has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Industrials industry average of 5.5%.

Check out our latest analysis for Energoprojekt Holding a.d

Historical performance is a great place to start when researching a stock so above you can see the gauge for Energoprojekt Holding a.d's ROCE against it's prior returns. If you're interested in investigating Energoprojekt Holding a.d's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Energoprojekt Holding a.d. To be more specific, the ROCE was 3.6% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Energoprojekt Holding a.d to turn into a multi-bagger.

On a separate but related note, it's important to know that Energoprojekt Holding a.d has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 61% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 3 warning signs for Energoprojekt Holding a.d (1 is significant) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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