Enviro-Hub Holdings (SGX:L23) Could Be Struggling To Allocate Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Enviro-Hub Holdings (SGX:L23), the trends above didn't look too great.

What Is 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 Enviro-Hub Holdings, this is the formula:

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

0.0092 = S$1.2m ÷ (S$152m - S$19m) (Based on the trailing twelve months to June 2023).

Thus, Enviro-Hub Holdings has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 8.8%.

View our latest analysis for Enviro-Hub Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Enviro-Hub Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Enviro-Hub Holdings, check out these free graphs here.

So How Is Enviro-Hub Holdings' ROCE Trending?

There is reason to be cautious about Enviro-Hub Holdings, given the returns are trending downwards. About five years ago, returns on capital were 3.2%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Enviro-Hub Holdings to turn into a multi-bagger.

Our Take On Enviro-Hub Holdings' ROCE

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 29% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 6 warning signs we've spotted with Enviro-Hub Holdings (including 1 which is concerning) .

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. 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.