Returns On Capital At Enhabit (NYSE:EHAB) Paint A Concerning Picture

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Enhabit (NYSE:EHAB), so let's see why.

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 Enhabit:

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

0.029 = US$37m ÷ (US$1.4b - US$140m) (Based on the trailing twelve months to June 2024).

Thus, Enhabit has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 10%.

View our latest analysis for Enhabit

Above you can see how the current ROCE for Enhabit compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Enhabit for free.

How Are Returns Trending?

There is reason to be cautious about Enhabit, given the returns are trending downwards. About three years ago, returns on capital were 8.0%, 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Enhabit becoming one if things continue as they have.

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 20% from where it was year ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you're still interested in Enhabit it's worth checking out our FREE intrinsic value approximation for EHAB to see if it's trading at an attractive price in other respects.

While Enhabit may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.