Capital Allocation Trends At pferdewetten.de (ETR:EMH) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Having said that, from a first glance at pferdewetten.de (ETR:EMH) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for pferdewetten.de, this is the formula:

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

0.12 = €2.1m ÷ (€28m - €11m) (Based on the trailing twelve months to June 2020).

So, pferdewetten.de has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 5.5% generated by the Hospitality industry.

See our latest analysis for pferdewetten.de

In the above chart we have measured pferdewetten.de'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 pferdewetten.de here for free.

What The Trend Of ROCE Can Tell Us

In terms of pferdewetten.de's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 12% from 29% five years ago. 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.

On a side note, pferdewetten.de's current liabilities have increased over the last five years to 41% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line

While returns have fallen for pferdewetten.de in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 296% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we've found 4 warning signs for pferdewetten.de that we think you should be aware of.

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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