If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Endeavour Group's (ASX:EDV) returns on capital, so let's have a look.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Endeavour Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = AU$916m ÷ (AU$11b - AU$2.7b) (Based on the trailing twelve months to January 2022).
Thus, Endeavour Group has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Consumer Retailing industry average it falls behind.
Above you can see how the current ROCE for Endeavour Group 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 Endeavour Group.
What Can We Tell From Endeavour Group's ROCE Trend?
Endeavour Group's ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last one year, the ROCE has climbed 1,868% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
On a related note, the company's ratio of current liabilities to total assets has decreased to 24%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
Our Take On Endeavour Group's ROCE
To sum it up, Endeavour Group is collecting higher returns from the same amount of capital, and that's impressive. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 24% return over the last year. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Endeavour Group does have some risks though, and we've spotted 1 warning sign for Endeavour Group that you might be interested in.
While Endeavour Group 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.