Returns Are Gaining Momentum At Enterprise Group (TSE:E)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Enterprise Group (TSE:E) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Enterprise Group:

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

0.014 = CA$694k ÷ (CA$51m - CA$2.9m) (Based on the trailing twelve months to December 2021).

Thus, Enterprise Group has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 21%.

Check out our latest analysis for Enterprise Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Enterprise Group's ROCE against it's prior returns. If you're interested in investigating Enterprise Group's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

It's great to see that Enterprise Group has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 1.4% which is no doubt a relief for some early shareholders. In regards to capital employed, Enterprise Group is using 40% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Enterprise Group could be selling under-performing assets since the ROCE is improving.

The Bottom Line

From what we've seen above, Enterprise Group has managed to increase it's returns on capital all the while reducing it's capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 28% to shareholders. So with that in mind, we think the stock deserves further research.

One more thing to note, we've identified 3 warning signs with Enterprise Group and understanding these should be part of your investment process.

While Enterprise 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.