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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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Empire (TSE:EMP.A) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Empire:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.097 = CA$1.3b ÷ (CA$17b - CA$3.8b) (Based on the trailing twelve months to November 2024).
Therefore, Empire has an ROCE of 9.7%. On its own, that's a low figure but it's around the 12% average generated by the Consumer Retailing industry.
View our latest analysis for Empire
In the above chart we have measured Empire'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 analyst report for Empire .
What Does the ROCE Trend For Empire Tell Us?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 9.7%. 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 21%. So we're very much inspired by what we're seeing at Empire thanks to its ability to profitably reinvest capital.
What We Can Learn From Empire's ROCE
In summary, it's great to see that Empire can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 48% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
While Empire looks impressive, no company is worth an infinite price. The intrinsic value infographic for EMP.A helps visualize whether it is currently trading for a fair price.