Evolution Gaming Group AB (publ) (STO:EVO) Earns Among The Best Returns In Its Industry

Today we’ll evaluate Evolution Gaming Group AB (publ) (STO:EVO) to determine whether it could have potential as an investment idea. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for Evolution Gaming Group:

0.54 = €136m ÷ (€369m – €117m) (Based on the trailing twelve months to September 2019.)

So, Evolution Gaming Group has an ROCE of 54%.

View our latest analysis for Evolution Gaming Group

Is Evolution Gaming Group’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Evolution Gaming Group’s ROCE is meaningfully higher than the 17% average in the Hospitality industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, Evolution Gaming Group’s ROCE currently appears to be excellent.

You can see in the image below how Evolution Gaming Group’s ROCE compares to its industry. Click to see more on past growth.

OM:EVO Past Revenue and Net Income, February 9th 2020
OM:EVO Past Revenue and Net Income, February 9th 2020

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect Evolution Gaming Group’s ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

Evolution Gaming Group has total assets of €369m and current liabilities of €117m. As a result, its current liabilities are equal to approximately 32% of its total assets. A medium level of current liabilities boosts Evolution Gaming Group’s ROCE somewhat.

The Bottom Line On Evolution Gaming Group’s ROCE

Despite this, it reports a high ROCE, and may be worth investigating further. There might be better investments than Evolution Gaming Group out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.