Returns On Capital Are Showing Encouraging Signs At EssilorLuxottica Société anonyme (EPA:EL)

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. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at EssilorLuxottica Société anonyme (EPA:EL) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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 EssilorLuxottica Société anonyme is:

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

0.068 = €3.4b ÷ (€61b - €11b) (Based on the trailing twelve months to June 2024).

Thus, EssilorLuxottica Société anonyme has an ROCE of 6.8%. In absolute terms, that's a low return but it's around the Medical Equipment industry average of 6.2%.

Check out our latest analysis for EssilorLuxottica Société anonyme

Above you can see how the current ROCE for EssilorLuxottica Société anonyme 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 analyst report for EssilorLuxottica Société anonyme .

What Does the ROCE Trend For EssilorLuxottica Société anonyme Tell Us?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 6.8%. Basically the business is earning more per dollar of capital invested and in addition to that, 21% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Our Take On EssilorLuxottica Société anonyme's ROCE

All in all, it's terrific to see that EssilorLuxottica Société anonyme is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 78% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for EL on our platform that is definitely worth checking out.

While EssilorLuxottica Société anonyme 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.