Yahoo Finance We Like These Underlying Return On Capital Trends At Tortilla Mexican Grill (LON:MEX)
What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Tortilla Mexican Grill's (LON:MEX) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Tortilla Mexican Grill, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.029 = UK£1.1m ÷ (UK£52m - UK£15m) (Based on the trailing twelve months to January 2023).
Therefore, Tortilla Mexican Grill has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 5.9%.
See 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'd like to see what analysts are forecasting going forward, you should check out our free report for Tortilla Mexican Grill.
The Trend Of ROCE
The fact that Tortilla Mexican Grill is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 2.9% on its capital. In addition to that, Tortilla Mexican Grill is employing 290% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
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. Given the stock has declined 54% in the last year, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
On a separate note, we've found 1 warning sign for Tortilla Mexican Grill you'll probably want to 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.
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.
