Here's What's Concerning About CTS Eventim KGaA's (ETR:EVD) Returns On Capital

There are a few key trends to look for if we want to identify the next 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Looking at CTS Eventim KGaA (ETR:EVD), it does have a high ROCE right now, but lets see how returns are trending.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on CTS Eventim KGaA is:

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

0.27 = €303m ÷ (€2.7b - €1.6b) (Based on the trailing twelve months to September 2023).

Thus, CTS Eventim KGaA has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 11%.

See our latest analysis for CTS Eventim KGaA

In the above chart we have measured CTS Eventim KGaA'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 CTS Eventim KGaA here for free.

So How Is CTS Eventim KGaA's ROCE Trending?

When we looked at the ROCE trend at CTS Eventim KGaA, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 34%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, CTS Eventim KGaA's current liabilities are still rather high at 58% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On CTS Eventim KGaA's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that CTS Eventim KGaA 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 109% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a separate note, we've found 1 warning sign for CTS Eventim KGaA you'll probably want to know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.