Here's What's Concerning About Evergreen Gaming's (CVE:TNA) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 Evergreen Gaming (CVE:TNA) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Evergreen Gaming is:

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

0.14 = US$5.4m ÷ (US$45m - US$6.8m) (Based on the trailing twelve months to September 2021).

Thus, Evergreen Gaming has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 8.1% it's much better.

Check out our latest analysis for Evergreen Gaming

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Evergreen Gaming has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Evergreen Gaming's ROCE Trending?

When we looked at the ROCE trend at Evergreen Gaming, we didn't gain much confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 14%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Evergreen Gaming is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 254% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Evergreen Gaming does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.