What are the first trends to look for to identify a title that could multiply over the long term? First, we will want to see a return on capital employed (ROCE) which increases and, on the other hand, a based capital employed. Basically, it means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a dialing machine. However, after investigating Enertronica Santerno (BIT: ENT), we don’t think the current trends fit the mold of a multi-bagger.

Understanding Return on Capital Employed (ROCE)

If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. To calculate this metric for Enertronica Santerno, here is the formula:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.004 = 121 K € ÷ (84 M € – 54 M €) (Based on the last twelve months up to December 2020).

Therefore, Enertronica Santerno has a ROCE of 0.4%. Ultimately, that’s low efficiency and it’s 11% below the electrical industry average.

See our latest review for Enertronica Santerno

BIT: ENT Return on capital employed June 14, 2021

Historical performance is a great place to start when looking for a stock. So above you can see the gauge of Enertronica Santerno’s ROCE compared to its past returns. If you want to look at the performance of Enertronica Santerno in the past in other metrics, you can check out this free graph of past income, income and cash flow.

What does the ROCE trend tell us for Enertronica Santerno?

On the surface, the ROCE trend at Enertronica Santerno does not inspire confidence. About five years ago, returns on capital were 45%, but since then they have fallen to 0.4%. And since incomes have fallen while employing more capital, we would be cautious. This could mean that the company is losing its competitive advantage or market share, because even if more money is invested in companies, it actually produces a lower return – “less bang for the buck” per se.

On a related note, Enertronica Santerno reduced its current liabilities to 64% of total assets. This could partly explain why the ROCE has fallen. In effect, this means that their suppliers or short-term creditors fund the business less, which reduces some elements of risk. Some argue that this reduces the company’s efficiency in generating ROCE since it now finances more of the operations with its own money. Either way, they’re still at a fairly high level, so we’d like to see them drop further if possible.

What we can learn from the ROCE of Enertronica Santerno

We are a little worried about Enertronica Santerno because despite the deployment of more capital in the company, the return on that capital and the sales have both fallen. Unsurprisingly, the stock has plunged 79% over the past five years, so investors recognize these changes and dislike the outlook for the company. With underlying trends not being great in these areas, we would consider looking elsewhere.

Enertronica Santerno does have some risks, however, and we have spotted 4 warning signs for Enertronica Santerno that might interest you.

If you want to look for solid businesses with great income, check out this free list of companies with good balance sheets and impressive returns on equity.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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