Empire (TSE:EMP.A) Shareholders Will Want The ROCE Trajectory To Continue

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Empire's (TSE:EMP.A) returns on capital, so let's have a look.

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 Empire is:

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

0.11 = CA$1.4b ÷ (CA$16b - CA$3.9b) (Based on the trailing twelve months to August 2022).

Therefore, Empire has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.

View our latest analysis for Empire

In the above chart we have measured Empire'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 Empire here for free.

What Can We Tell From Empire's ROCE Trend?

Empire is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 101% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Empire's ROCE

In summary, it's great to see that Empire can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 76% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Empire can keep these trends up, it could have a bright future ahead.

While Empire looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether EMP.A is currently trading for a fair price.

While Empire 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.