Stock Analysis

The Returns At Endeavour Group (ASX:EDV) Aren't Growing

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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Endeavour Group's (ASX:EDV) ROCE trend, we were pretty happy with what we saw.

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

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. 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$1.0b ÷ (AU$12b - AU$2.1b) (Based on the trailing twelve months to June 2023).

Thus, Endeavour Group has an ROCE of 11%. In isolation, that's a pretty standard return but against the Consumer Retailing industry average of 14%, it's not as good.

Check out our latest analysis for Endeavour Group

ASX:EDV Return on Capital Employed October 20th 2023

In the above chart we have measured Endeavour Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Endeavour Group here for free.

What The Trend Of ROCE Can Tell Us

While the returns on capital are good, they haven't moved much. Over the past two years, ROCE has remained relatively flat at around 11% and the business has deployed 37% more capital into its operations. 11% is a pretty standard return, and it provides some comfort knowing that Endeavour Group has consistently earned this amount. 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.

On a side note, Endeavour Group has done well to reduce current liabilities to 18% of total assets over the last two years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Endeavour Group's ROCE

The main thing to remember is that Endeavour Group has proven its ability to continually reinvest at respectable rates of return. However, despite the favorable fundamentals, the stock has fallen 27% over the last year, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

Endeavour Group does have some risks though, and we've spotted 2 warning signs for Endeavour Group that you might be interested in.

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.

Valuation is complex, but we're here to simplify it.

Discover if Endeavour Group might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.