Tortilla Mexican Grill (LON:MEX) Is Experiencing Growth In Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Tortilla Mexican Grill (LON:MEX) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Tortilla Mexican Grill:

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).

Therefore, Tortilla Mexican Grill has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 7.3%.

Check out our latest analysis for Tortilla Mexican Grill

In the above chart we have measured Tortilla Mexican Grill'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 Tortilla Mexican Grill for free.

What Does the ROCE Trend For Tortilla Mexican Grill Tell Us?

The fact that Tortilla Mexican Grill is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 1.1% on its capital. Not only that, but the company is utilizing 84% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

Our Take On 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. Astute investors may have an opportunity here because the stock has declined 63% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing to note, we've identified 2 warning signs with Tortilla Mexican Grill and understanding these should be part of your investment process.

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.