Investors Will Want Enerpac Tool Group's (NYSE:EPAC) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. With that in mind, we've noticed some promising trends at Enerpac Tool Group (NYSE:EPAC) 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 Enerpac Tool Group:

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

0.063 = US$42m ÷ (US$797m - US$135m) (Based on the trailing twelve months to May 2022).

Thus, Enerpac Tool Group has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 10%.

Check out 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Enerpac Tool Group's ROCE Trending?

We're pretty happy with how the ROCE has been trending at Enerpac Tool Group. The figures show that over the last five years, returns on capital have grown by 23%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 46% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

What We Can Learn From Enerpac Tool Group's ROCE

In a nutshell, we're pleased to see that Enerpac Tool Group has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 15% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Enerpac Tool Group does have some risks though, and we've spotted 2 warning signs for Enerpac Tool Group that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.