What Do The Returns On Capital At EVS Broadcast Equipment (EBR:EVS) Tell Us?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at EVS Broadcast Equipment (EBR:EVS) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for EVS Broadcast Equipment, this is the formula:

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

0.15 = €23m ÷ (€196m - €37m) (Based on the trailing twelve months to June 2020).

Thus, EVS Broadcast Equipment has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Communications industry average of 10% it's much better.

Check out our latest analysis for EVS Broadcast Equipment

In the above chart we have measured EVS Broadcast Equipment'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 EVS Broadcast Equipment here for free.

What Can We Tell From EVS Broadcast Equipment's ROCE Trend?

On the surface, the trend of ROCE at EVS Broadcast Equipment doesn't inspire confidence. Over the last five years, returns on capital have decreased to 15% from 33% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On EVS Broadcast Equipment's ROCE

In summary, EVS Broadcast Equipment is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 37% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know about the risks facing EVS Broadcast Equipment, we've discovered 1 warning sign that you should be aware of.

While EVS Broadcast Equipment 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 free list here.

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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. 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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