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

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Enviro-Hub Holdings (SGX:L23), so let's see why.

Understanding 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. The formula for this calculation on Enviro-Hub Holdings is:

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).

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

See our latest analysis for Enviro-Hub Holdings

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 want to delve into the historical earnings, revenue and cash flow of Enviro-Hub Holdings, check out these free graphs here.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Enviro-Hub Holdings. About five years ago, returns on capital were 3.2%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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

In summary, it's unfortunate that Enviro-Hub Holdings is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 46% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 6 warning signs for Enviro-Hub Holdings (of which 1 is potentially serious!) that you should know about.

While Enviro-Hub Holdings 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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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.