Returns On Capital At Empresaria Group (LON:EMR) Have Stalled
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. In light of that, when we looked at Empresaria Group (LON:EMR) and its ROCE trend, we weren't exactly thrilled.
Understanding 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 Empresaria Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = UK£8.8m ÷ (UK£124m - UK£69m) (Based on the trailing twelve months to December 2022).
Thus, Empresaria Group has an ROCE of 16%. By itself that's a normal return on capital and it's in line with the industry's average returns of 16%.
View our latest analysis for Empresaria Group
Above you can see how the current ROCE for Empresaria Group 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 Empresaria Group here for free.
How Are Returns Trending?
Over the past five years, Empresaria Group's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Empresaria Group in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
On a separate but related note, it's important to know that Empresaria Group has a current liabilities to total assets ratio of 56%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Empresaria Group's ROCE
We can conclude that in regards to Empresaria Group's returns on capital employed and the trends, there isn't much change to report on. And in the last five years, the stock has given away 23% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Empresaria Group has the makings of a multi-bagger.
One more thing: We've identified 4 warning signs with Empresaria Group (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.
While Empresaria Group 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.
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