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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Tortilla Mexican Grill (LON:MEX) and its trend of ROCE, we really liked what we saw.
What Is 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 Tortilla Mexican Grill:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = UK£1.1m ÷ (UK£51m - UK£15m) (Based on the trailing twelve months to December 2023).
Thus, Tortilla Mexican Grill has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 7.5%.
See our latest analysis for Tortilla Mexican Grill
In the above chart we have measured Tortilla Mexican Grill'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 Tortilla Mexican Grill .
What Can We Tell From Tortilla Mexican Grill's ROCE Trend?
While there are companies with higher returns on capital out there, we still find the trend at Tortilla Mexican Grill promising. The figures show that over the last five years, ROCE has grown 127% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
Our Take On Tortilla Mexican Grill's ROCE
In summary, we're delighted to see that Tortilla Mexican Grill has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 33% over the last year, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
One more thing, we've spotted 1 warning sign facing Tortilla Mexican Grill that you might find interesting.