Enerflex (TSE:EFX) May Have Issues Allocating Its Capital
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Enerflex (TSE:EFX), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Enerflex:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.022 = CA$68m ÷ (CA$4.2b - CA$1.1b) (Based on the trailing twelve months to June 2023).
Therefore, Enerflex has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 13%.
View our latest analysis for Enerflex
Above you can see how the current ROCE for Enerflex compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Enerflex.
So How Is Enerflex's ROCE Trending?
On the surface, the trend of ROCE at Enerflex doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.2% from 6.6% 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.
Our Take On Enerflex's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Enerflex is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 42% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
Enerflex does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.
While Enerflex 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.
