Yahoo Finance There Are Reasons To Feel Uneasy About EVT's (ASX:EVT) Returns On Capital
What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Although, when we looked at EVT (ASX:EVT), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on EVT is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = AU$102m ÷ (AU$2.6b - AU$410m) (Based on the trailing twelve months to December 2023).
Thus, EVT has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 8.6%.
See our latest analysis for EVT
In the above chart we have measured EVT's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering EVT for free.
The Trend Of ROCE
On the surface, the trend of ROCE at EVT doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.6% from 9.8% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line
While returns have fallen for EVT in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 1.2% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
One more thing to note, we've identified 2 warning signs with EVT and understanding these should be part of your investment process.
While EVT isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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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