If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Endeavour Group's (ASX:EDV) trend of ROCE, we liked what we saw.

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. The formula for this calculation on Endeavour Group is:

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

0.11 = AU$1.0b ÷ (AU$12b - AU$2.1b) (Based on the trailing twelve months to June 2023).

Therefore, Endeavour Group has an ROCE of 11%. In isolation, that's a pretty standard return but against the Consumer Retailing industry average of 14%, it's not as good.

Check out our latest analysis for Endeavour Group  roce

Above you can see how the current ROCE for Endeavour 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 freereport for Endeavour Group.

What Can We Tell From Endeavour Group's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 37% more capital in the last two years, and the returns on that capital have remained stable at 11%. 11% is a pretty standard return, and it provides some comfort knowing that Endeavour Group has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.



One more thing to note, even though ROCE has remained relatively flat over the last two years, the reduction in current liabilities to 18% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Key Takeaway

The main thing to remember is that Endeavour Group has proven its ability to continually reinvest at respectable rates of return. Yet over the last year the stock has declined 20%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

One more thing to note, we've identified  2 warning signs  with Endeavour Group and understanding them should be part of your investment process.

While Endeavour 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 freelist 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.