Returns At Tortilla Mexican Grill (LON:MEX) 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? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, we've noticed some promising trends at Tortilla Mexican Grill (LON:MEX) so let's look a bit deeper.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Tortilla Mexican Grill is:

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

0.011 = UK£398k ÷ (UK£52m - UK£15m) (Based on the trailing twelve months to July 2023).

So, Tortilla Mexican Grill has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 7.3%.

View our latest analysis for Tortilla Mexican Grill

Above you can see how the current ROCE for Tortilla Mexican Grill compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Tortilla Mexican Grill's ROCE Trend?

We're delighted to see that Tortilla Mexican Grill is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.1% on its capital. In addition to that, Tortilla Mexican Grill is employing 84% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

What We Can Learn From Tortilla Mexican Grill's ROCE

In summary, it's great to see that Tortilla Mexican Grill has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 43% over the last year, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to continue researching Tortilla Mexican Grill, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Tortilla Mexican Grill 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.