Yahoo Finance Investors Will Want Tortilla Mexican Grill's (LON:MEX) Growth In ROCE To Persist
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Tortilla Mexican Grill's (LON:MEX) 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. 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)
0.093 = UK£3.4m ÷ (UK£52m - UK£15m) (Based on the trailing twelve months to July 2022).
Therefore, Tortilla Mexican Grill has an ROCE of 9.3%. On its own, that's a low figure but it's around the 7.9% average generated by the Hospitality industry.
Check out our latest analysis for Tortilla Mexican Grill
Above you can see how the current ROCE for Tortilla Mexican Grill compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Tortilla Mexican Grill's ROCE Trend?
The fact that Tortilla Mexican Grill is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 9.3% which is a sight for sore eyes. In addition to that, Tortilla Mexican Grill is employing 314% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
In Conclusion...
Long story short, we're delighted to see that Tortilla Mexican Grill's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 54% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Tortilla Mexican Grill does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
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.
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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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