Enfusion (NYSE:ENFN) Will Be Hoping To Turn Its Returns On Capital Around
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Enfusion (NYSE:ENFN), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Enfusion, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$11m ÷ (US$94m - US$14m) (Based on the trailing twelve months to June 2023).
So, Enfusion has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 10% generated by the Software industry.
View our latest analysis for Enfusion
Above you can see how the current ROCE for Enfusion 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 Enfusion.
The Trend Of ROCE
We weren't thrilled with the trend because Enfusion's ROCE has reduced by 69% over the last three years, while the business employed 269% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Enfusion might not have received a full period of earnings contribution from it.
On a related note, Enfusion has decreased its current liabilities to 15% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
What We Can Learn From Enfusion'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 Enfusion. These growth trends haven't led to growth returns though, since the stock has fallen 45% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
Like most companies, Enfusion does come with some risks, and we've found 2 warning signs that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
