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Enterprise Group (TSE:E) Is Doing The Right Things To Multiply Its Share Price

·2 min read

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Enterprise Group (TSE:E) looks quite promising in regards to its trends of return on capital.

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 Enterprise Group:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.014 = CA$694k ÷ (CA$51m - CA$2.9m) (Based on the trailing twelve months to December 2021).

Therefore, Enterprise Group has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 19%.

View our latest analysis for Enterprise Group

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roce

Historical performance is a great place to start when researching a stock so above you can see the gauge for Enterprise Group's ROCE against it's prior returns. If you'd like to look at how Enterprise Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Like most people, we're pleased that Enterprise Group is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 40%. This could potentially mean that the company is selling some of its assets.

What We Can Learn From Enterprise Group's ROCE

In a nutshell, we're pleased to see that Enterprise Group has been able to generate higher returns from less capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 17% to shareholders. So with that in mind, we think the stock deserves further research.

One more thing to note, we've identified 2 warning signs with Enterprise Group and understanding them 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.