La Française des Jeux Société anonyme (EPA:FDJ) Might Become A Compounding Machine

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. 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.

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. 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)

0.24 = €325m ÷ (€2.9b - €1.6b) (Based on the trailing twelve months to December 2020).

Thus, La Française des Jeux Société anonyme has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 6.2% earned by companies in a similar industry.

See our latest analysis for La Française des Jeux Société anonyme

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?

It's hard not to be impressed by La Française des Jeux Société anonyme's returns on capital. The company has consistently earned 24% for the last five years, and the capital employed within the business has risen 56% in that time. Now considering ROCE is an attractive 24%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

On a separate but related note, it's important to know that La Française des Jeux Société anonyme has a current liabilities to total assets ratio of 54%, which we'd consider pretty high. 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 short, we'd argue La Française des Jeux Société anonyme has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has followed suit returning a meaningful 80% to shareholders over the last year. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

One more thing to note, we've identified 2 warning signs with La Française des Jeux Société anonyme and understanding these should be part of your investment process.

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