We Like These Underlying Return On Capital Trends At Enerpac Tool Group (NYSE:EPAC)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we've noticed some promising trends at Enerpac Tool Group (NYSE:EPAC) so let's look a bit deeper.

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. The formula for this calculation on Enerpac Tool Group is:

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

0.19 = US$119m ÷ (US$763m - US$148m) (Based on the trailing twelve months to August 2023).

So, Enerpac Tool Group has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 12% generated by the Machinery industry.

View 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.

What The Trend Of ROCE Can Tell Us

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 247% over the trailing five years. The company is now earning US$0.2 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 46% less than it was five years ago, which can be indicative of a business that's improving its efficiency. 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.

Our Take On Enerpac Tool Group's ROCE

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. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 27% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing to note, we've identified 1 warning sign with Enerpac Tool Group and understanding it should be part of your investment process.

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.