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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Ingles Markets' (NASDAQ:IMKT.A) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Ingles Markets is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$234m ÷ (US$2.5b - US$287m) (Based on the trailing twelve months to March 2024).
Thus, Ingles Markets has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Retailing industry average of 10%.
View our latest analysis for Ingles Markets
Historical performance is a great place to start when researching a stock so above you can see the gauge for Ingles Markets' ROCE against it's prior returns. If you're interested in investigating Ingles Markets' past further, check out this free graph covering Ingles Markets' past earnings, revenue and cash flow.
What Does the ROCE Trend For Ingles Markets Tell Us?
We like the trends that we're seeing from Ingles Markets. Over the last five years, returns on capital employed have risen substantially to 11%. The amount of capital employed has increased too, by 38%. So we're very much inspired by what we're seeing at Ingles Markets thanks to its ability to profitably reinvest capital.
What We Can Learn From Ingles Markets' ROCE
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 with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
One more thing to note, we've identified 1 warning sign with Ingles Markets 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.