The Return Trends At Grupo Palacio de Hierro. de (BMV:GPH1) Look Promising

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Grupo Palacio de Hierro. de's (BMV:GPH1) returns on capital, so let's have a look.

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

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. To calculate this metric for Grupo Palacio de Hierro. de, this is the formula:

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

0.047 = Mex$1.5b ÷ (Mex$46b - Mex$13b) (Based on the trailing twelve months to September 2022).

Therefore, Grupo Palacio de Hierro. de has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Multiline Retail industry average of 9.9%.

Check out the opportunities and risks within the XX Multiline Retail industry.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Grupo Palacio de Hierro. de, check out these free graphs here.

The Trend Of ROCE

We're delighted to see that Grupo Palacio de Hierro. de is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 4.7% on its capital. Not only that, but the company is utilizing 25% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line On Grupo Palacio de Hierro. de's ROCE

Overall, Grupo Palacio de Hierro. de gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know more about Grupo Palacio de Hierro. de, we've spotted 3 warning signs, and 2 of them can't be ignored.

While Grupo Palacio de Hierro. de 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.