Enerpac Tool Group (NYSE:EPAC) Is Doing The Right Things To Multiply Its Share Price
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in Enerpac Tool Group's (NYSE:EPAC) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Enerpac Tool Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = US$65m ÷ (US$821m - US$140m) (Based on the trailing twelve months to February 2022).
So, Enerpac Tool Group has an ROCE of 9.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 10%.
View our latest analysis for Enerpac Tool Group
Above you can see how the current ROCE for Enerpac Tool Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Enerpac Tool Group.
The Trend Of ROCE
Enerpac Tool Group has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 69%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 42% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
The Key Takeaway
From what we've seen above, Enerpac Tool Group has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 24% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
Enerpac Tool Group does have some risks though, and we've spotted 2 warning signs for Enerpac Tool Group that you might be interested in.
While Enerpac Tool Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
