Investors Shouldn't Overlook The Favourable Returns On Capital At La Française des Jeux Société anonyme (EPA:FDJ)

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at La Française des Jeux Société anonyme's (EPA:FDJ) ROCE trend, we were very happy with what we saw.

Understanding Return On Capital Employed (ROCE)

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. 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)

0.34 = €454m ÷ (€2.9b - €1.6b) (Based on the trailing twelve months to June 2023).

Thus, 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 7.5%.

View our latest analysis for La Française des Jeux Société anonyme

In the above chart we have measured La Française des Jeux Société anonyme'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 La Française des Jeux Société anonyme here for free.

What Can We Tell From La Française des Jeux Société anonyme's ROCE Trend?

We'd be pretty happy with returns on capital like La Française des Jeux Société anonyme. Over the past five years, ROCE has remained relatively flat at around 34% and the business has deployed 55% more capital into its operations. 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.

Another thing to note, La Française des Jeux Société anonyme has a high ratio of current liabilities to total assets of 55%. 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

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. Despite the good fundamentals, total returns from the stock have been virtually flat over the last three years. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

If you'd like to know about the risks facing La Française des Jeux Société anonyme, we've discovered 1 warning sign that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.