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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? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Enerpac Tool Group's (NYSE:EPAC) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Enerpac Tool Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = US$55m ÷ (US$757m - US$153m) (Based on the trailing twelve months to August 2022).
So, Enerpac Tool Group has an ROCE of 9.0%. In absolute terms, that's a low return but it's around the Machinery industry average of 11%.
Check out the opportunities and risks within the US Machinery industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Enerpac Tool Group's ROCE against it's prior returns. If you'd like to look at how Enerpac Tool Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Enerpac Tool Group's ROCE Trending?
Enerpac Tool Group has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 144%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Enerpac Tool Group appears to been achieving more with less, since the business is using 47% less capital to run its operation. Enerpac Tool Group may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Bottom Line
In summary, it's great to see that Enerpac Tool Group has been able to turn things around and earn higher returns on lower amounts of capital. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.
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.
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.
Valuation is complex, but we're here to simplify it.
Discover if Enerpac Tool Group might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
About NYSE:EPAC
Enerpac Tool Group
Manufactures and sells a range of industrial products and solutions in the United States, the United Kingdom, Germany, Australia, Canada, China, Saudi Arabia, Brazil, France, and internationally.
Flawless balance sheet with solid track record.