Ingles Markets (NASDAQ:IMKT.A) Knows How To Allocate Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Ingles Markets' (NASDAQ:IMKT.A) look very promising so lets take a look.

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 Ingles Markets, this is the formula:

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

0.20 = US$371m ÷ (US$2.2b - US$319m) (Based on the trailing twelve months to June 2022).

Therefore, Ingles Markets has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Consumer Retailing industry average of 9.2%.

View our latest analysis for Ingles Markets

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Ingles Markets' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Ingles Markets' ROCE Trend?

We like the trends that we're seeing from Ingles Markets. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 20%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 32%. So we're very much inspired by what we're seeing at Ingles Markets thanks to its ability to profitably reinvest capital.

The Bottom Line

All in all, it's terrific to see that Ingles Markets is reaping the rewards from prior investments and is growing its capital base. And a remarkable 366% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Ingles Markets can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for Ingles Markets that we think you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.