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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So, when we ran our eye over Empire's (TSE:EMP.A) trend of ROCE, we liked what we saw.
What is 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 Empire:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = CA$1.3b ÷ (CA$16b - CA$3.6b) (Based on the trailing twelve months to July 2021).
So, Empire has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 11% generated by the Consumer Retailing industry.
Above you can see how the current ROCE for Empire compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Empire here for free.
So How Is Empire's ROCE Trending?
While the current returns on capital are decent, they haven't changed much. The company has employed 94% more capital in the last five years, and the returns on that capital have remained stable at 10%. Since 10% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
What We Can Learn From Empire's ROCE
To sum it up, Empire has simply been reinvesting capital steadily, at those decent rates of return. And the stock has done incredibly well with a 112% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
If you're still interested in Empire it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
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.
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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