Returns At Enterprise Group (TSE:E) Are On The Way Up

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 looked at Enterprise Group (TSE:E) and its trend of ROCE, we really liked what we saw.

What Is 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)

0.033 = CA$1.5m ÷ (CA$50m - CA$2.7m) (Based on the trailing twelve months to June 2022).

Thus, Enterprise Group has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 19%.

See our latest analysis for Enterprise Group

In the above chart we have measured Enterprise Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Enterprise Group.

How Are Returns Trending?

Like most people, we're pleased that Enterprise Group is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 3.3% on their capital employed. Additionally, the business is utilizing 40% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Enterprise Group could be selling under-performing assets since the ROCE is improving.

In Conclusion...

In summary, it's great to see that Enterprise Group has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has only returned 26% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

If you want to continue researching Enterprise Group, you might be interested to know about the 4 warning signs that our analysis has discovered.

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.

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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.