The Returns On Capital At Espey Mfg. & Electronics (NYSEMKT:ESP) Don't Inspire Confidence

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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Espey Mfg. & Electronics (NYSEMKT:ESP), we weren't too hopeful.

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. Analysts use this formula to calculate it for Espey Mfg. & Electronics:

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

0.043 = US$1.3m ÷ (US$38m - US$7.2m) (Based on the trailing twelve months to September 2020).

Therefore, Espey Mfg. & Electronics has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Electrical industry average of 8.3%.

See our latest analysis for Espey Mfg. & Electronics

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

What Does the ROCE Trend For Espey Mfg. & Electronics Tell Us?

In terms of Espey Mfg. & Electronics' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 14% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Espey Mfg. & Electronics to turn into a multi-bagger.

What We Can Learn From Espey Mfg. & Electronics' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Espey Mfg. & Electronics, we've spotted 4 warning signs, and 1 of them can't be ignored.

While Espey Mfg. & Electronics 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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