Caltagirone Editore's (BIT:CED) Returns On Capital Are Heading Higher

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. Speaking of which, we noticed some great changes in Caltagirone Editore's (BIT:CED) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Caltagirone Editore, this is the formula:

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

0.0046 = €1.8m ÷ (€450m - €63m) (Based on the trailing twelve months to December 2020).

Therefore, Caltagirone Editore has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Media industry average of 6.0%.

See our latest analysis for Caltagirone Editore

Historical performance is a great place to start when researching a stock so above you can see the gauge for Caltagirone Editore's ROCE against it's prior returns. If you're interested in investigating Caltagirone Editore's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're delighted to see that Caltagirone Editore is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 0.5% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 41% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

The Key Takeaway

From what we've seen above, Caltagirone Editore has managed to increase it's returns on capital all the while reducing it's capital base. Considering the stock has delivered 6.7% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

While Caltagirone Editore looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether CED is currently trading for a fair price.

While Caltagirone Editore may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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