Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So, when we ran our eye over La Française des Jeux Société anonyme's (EPA:FDJ) trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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 La Française des Jeux Société anonyme, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.28 = €393m ÷ (€3.2b - €1.8b) (Based on the trailing twelve months to December 2021).
So, La Française des Jeux Société anonyme has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 2.5% earned by companies in a similar industry.
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.
What Can We Tell From La Française des Jeux Société anonyme's ROCE Trend?
In terms of La Française des Jeux Société anonyme's history of ROCE, it's quite impressive. The company has employed 72% more capital in the last five years, and the returns on that capital have remained stable at 28%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.
On a side note, La Française des Jeux Société anonyme's current liabilities are still rather high at 56% 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
Our Take On La Française des Jeux Société anonyme's ROCE
La Française des Jeux Société anonyme has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. However, despite the favorable fundamentals, the stock has fallen 20% over the last year, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
On a final note, we've found 1 warning sign for La Française des Jeux Société anonyme that we think you should be aware of.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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.