There's Been No Shortage Of Growth Recently For Casta Diva Group's (BIT:CDG) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Casta Diva Group (BIT:CDG) and its trend of ROCE, we really liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Casta Diva Group is:

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

0.19 = €3.5m ÷ (€62m - €44m) (Based on the trailing twelve months to December 2022).

Thus, Casta Diva Group has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Entertainment industry average of 10% it's much better.

Check out our latest analysis for Casta Diva Group

In the above chart we have measured Casta Diva Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Casta Diva Group's ROCE Trending?

Investors would be pleased with what's happening at Casta Diva Group. The data shows that returns on capital have increased substantially over the last five years to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 98% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 71% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line

All in all, it's terrific to see that Casta Diva Group is reaping the rewards from prior investments and is growing its capital base. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to know some of the risks facing Casta Diva Group we've found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Casta Diva Group isn't earning the highest return, check out this free list of companies that are 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.