What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. So on that note, Empire (TSE:EMP.A) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Empire:

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

0.10 = CA$1.3b ÷ (CA$16b - CA$3.7b) (Based on the trailing twelve months to January 2022).

Therefore, Empire has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 11% generated by the Consumer Retailing industry.

View our latest analysis for Empire

Above you can see how the current ROCE for Empire compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Empire here for free.

What Can We Tell From Empire's ROCE Trend?

We like the trends that we're seeing from Empire. The data shows that returns on capital have increased substantially over the last five years to 10%. 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 101%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Empire has. Since the stock has returned a staggering 137% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

While Empire looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether EMP.A is currently trading for a fair price.

While Empire 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.

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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.