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Enphase Energy (NASDAQ:ENPH) Could Be Struggling To Allocate Capital

Simply Wall St · 01/01 10:52

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. In light of that, when we looked at Enphase Energy (NASDAQ:ENPH) and its ROCE trend, we weren't exactly thrilled.

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Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Enphase Energy is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.096 = US$207m ÷ (US$3.3b - US$1.2b) (Based on the trailing twelve months to September 2025).

So, Enphase Energy has an ROCE of 9.6%. On its own, that's a low figure but it's around the 8.9% average generated by the Semiconductor industry.

Check out our latest analysis for Enphase Energy

roce
NasdaqGM:ENPH Return on Capital Employed January 1st 2026

In the above chart we have measured Enphase Energy's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Enphase Energy .

How Are Returns Trending?

When we looked at the ROCE trend at Enphase Energy, we didn't gain much confidence. To be more specific, ROCE has fallen from 18% over the last five years. 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, Enphase Energy'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 Key Takeaway

While returns have fallen for Enphase Energy in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Despite these promising trends, the stock has collapsed 84% over the last five years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

One more thing, we've spotted 1 warning sign facing Enphase Energy that you might find interesting.

While Enphase Energy 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.