Return Trends At Edel SE KGaA (ETR:EDL) Aren't Appealing

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Edel SE KGaA (ETR:EDL), it didn't seem to tick all of these boxes.

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 Edel SE KGaA, this is the formula:

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

0.088 = €8.5m ÷ (€158m - €62m) (Based on the trailing twelve months to September 2020).

Thus, Edel SE KGaA has an ROCE of 8.8%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 11%.

Check out our latest analysis for Edel SE KGaA

Historical performance is a great place to start when researching a stock so above you can see the gauge for Edel SE KGaA's ROCE against it's prior returns. If you're interested in investigating Edel SE KGaA's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Edel SE KGaA's ROCE Trend?

In terms of Edel SE KGaA's historical ROCE trend, it doesn't exactly demand attention. The company has employed 37% more capital in the last five years, and the returns on that capital have remained stable at 8.8%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Edel SE KGaA's ROCE

In summary, Edel SE KGaA has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 79% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 5 warning signs with Edel SE KGaA (at least 1 which is concerning) , and understanding them would certainly be useful.

While Edel SE KGaA 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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