Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Highlight Event and Entertainment (VTX:HLEE) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for Highlight Event and Entertainment, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = CHF49m ÷ (CHF942m - CHF362m) (Based on the trailing twelve months to June 2020).
So, Highlight Event and Entertainment has an ROCE of 8.4%. In absolute terms, that's a low return but it's around the Media industry average of 8.9%.
Above you can see how the current ROCE for Highlight Event and Entertainment compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Highlight Event and Entertainment here for free.
What Can We Tell From Highlight Event and Entertainment's ROCE Trend?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 8.4%. The amount of capital employed has increased too, by 2,754%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 38% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
What We Can Learn From Highlight Event and Entertainment's ROCE
To sum it up, Highlight Event and Entertainment has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 87% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you want to continue researching Highlight Event and Entertainment, you might be interested to know about the 3 warning signs that our analysis has discovered.
While Highlight Event and Entertainment 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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