Yahoo Finance Engenco's (ASX:EGN) Returns On Capital Not Reflecting Well On The Business
There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Engenco (ASX:EGN), it didn't seem to tick all of these boxes.
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 Engenco:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.053 = AU$6.0m ÷ (AU$175m - AU$62m) (Based on the trailing twelve months to June 2023).
Thus, Engenco has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.7%.
View our latest analysis for Engenco
Historical performance is a great place to start when researching a stock so above you can see the gauge for Engenco's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Engenco, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Engenco, we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 5.3%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, Engenco's current liabilities have increased over the last five years to 35% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
The Bottom Line On Engenco's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Engenco. And there could be an opportunity here if other metrics look good too, because the stock has declined 37% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
One final note, you should learn about the 3 warning signs we've spotted with Engenco (including 1 which is a bit unpleasant) .
While Engenco 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.
