Returns On Capital Are Showing Encouraging Signs At EMCOR Group (NYSE:EME)

By
Simply Wall St
Published
November 15, 2021
NYSE:EME
Source: Shutterstock

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in EMCOR Group's (NYSE:EME) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for EMCOR Group:

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

0.17 = US$531m ÷ (US$5.3b - US$2.3b) (Based on the trailing twelve months to September 2021).

So, EMCOR Group has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 8.4% it's much better.

View our latest analysis for EMCOR Group

roce
NYSE:EME Return on Capital Employed November 16th 2021

Above you can see how the current ROCE for EMCOR Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering EMCOR Group here for free.

The Trend Of ROCE

EMCOR Group is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 25%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a separate but related note, it's important to know that EMCOR Group has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

To sum it up, EMCOR Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 89% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, EMCOR Group does come with some risks, and we've found 1 warning sign that you should be aware of.

While EMCOR Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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