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

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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Enerpac Tool Group's (NYSE:EPAC) 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. 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)

0.17 = US$112m ÷ (US$793m - US$140m) (Based on the trailing twelve months to May 2023).

Thus, Enerpac Tool Group has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 11% generated by the Machinery industry.

Check out our latest analysis for Enerpac Tool Group

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're interested in investigating Enerpac Tool Group's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Enerpac Tool Group has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 124% 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 46% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

In Conclusion...

From what we've seen above, Enerpac Tool Group has managed to increase it's returns on capital all the while reducing it's capital base. Astute investors may have an opportunity here because the stock has declined 11% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Enerpac Tool Group does have some risks though, and we've spotted 1 warning sign for Enerpac Tool Group that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.