Capital Investment Trends At La Française des Jeux Société anonyme (EPA:FDJ) Look Strong

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Ergo, when we looked at the ROCE trends at La Française des Jeux Société anonyme (EPA:FDJ), we liked what we saw.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for La Française des Jeux Société anonyme:

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

0.34 = €441m ÷ (€2.8b - €1.5b) (Based on the trailing twelve months to June 2022).

So, La Française des Jeux Société anonyme has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 4.6%.

Our analysis indicates that FDJ is potentially undervalued!

Above you can see how the current ROCE for La Française des Jeux Société anonyme 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 La Française des Jeux Société anonyme here for free.

So How Is La Française des Jeux Société anonyme's ROCE Trending?

We'd be pretty happy with returns on capital like La Française des Jeux Société anonyme. The company has consistently earned 34% for the last five years, and the capital employed within the business has risen 54% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

On a side note, La Française des Jeux Société anonyme's current liabilities are still rather high at 54% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From La Française des Jeux Société anonyme's ROCE

In summary, we're delighted to see that La Française des Jeux Société anonyme has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Therefore it's no surprise that shareholders have earned a respectable 82% return if they held over the last three years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing, we've spotted 1 warning sign facing La Française des Jeux Société anonyme that you might find interesting.

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.