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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? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after briefly looking over the numbers, we don't think Empire (TSE:EMP.A) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is 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)
0.097 = CA$1.2b ÷ (CA$17b - CA$3.9b) (Based on the trailing twelve months to May 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.
See 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 for free.
How Are Returns Trending?
In terms of Empire's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 9.7% for the last five years, and the capital employed within the business has risen 86% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line
In summary, Empire has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 8.6% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
If you want to continue researching Empire, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.