Yahoo Finance There Are Reasons To Feel Uneasy About EVZ's (ASX:EVZ) Returns On Capital
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at EVZ (ASX:EVZ), it didn't seem to tick all of these boxes.
Understanding 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 EVZ:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = AU$2.3m ÷ (AU$61m - AU$23m) (Based on the trailing twelve months to December 2023).
Therefore, EVZ has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 15%.
View our latest analysis for EVZ
Historical performance is a great place to start when researching a stock so above you can see the gauge for EVZ's ROCE against it's prior returns. If you're interested in investigating EVZ's past further, check out this free graph covering EVZ's past earnings, revenue and cash flow.
So How Is EVZ's ROCE Trending?
When we looked at the ROCE trend at EVZ, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.1% from 10% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.
The Key Takeaway
While returns have fallen for EVZ in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 30% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
One more thing, we've spotted 1 warning sign facing EVZ that you might find interesting.
While EVZ 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.
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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.
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