Enerpac Tool Group (NYSE:EPAC) Is Experiencing Growth In Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Enerpac Tool Group (NYSE:EPAC) and its trend of ROCE, we really liked what we saw.

Understanding 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. To calculate this metric for Enerpac Tool Group, this is the formula:

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

0.095 = US$65m ÷ (US$821m - US$140m) (Based on the trailing twelve months to February 2022).

So, Enerpac Tool Group has an ROCE of 9.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.9%.

See our latest analysis for Enerpac Tool Group

In the above chart we have measured Enerpac Tool Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Enerpac Tool Group.

How Are Returns Trending?

We're pretty happy with how the ROCE has been trending at Enerpac Tool Group. The data shows that returns on capital have increased by 69% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Enerpac Tool Group appears to been achieving more with less, since the business is using 42% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

Our Take On Enerpac Tool Group's ROCE

In the end, Enerpac Tool Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 20% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 2 warning signs for Enerpac Tool Group you'll probably want to know about.

While Enerpac Tool Group 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.