Iervolino Entertainment (BIT:IE) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Looking at Iervolino Entertainment (BIT:IE), it does have a high ROCE right now, but lets see how returns are trending.

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. The formula for this calculation on Iervolino Entertainment is:

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

0.38 = €24m ÷ (€118m - €56m) (Based on the trailing twelve months to June 2020).

So, Iervolino Entertainment has an ROCE of 38%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 9.0%.

Check out our latest analysis for Iervolino Entertainment

Above you can see how the current ROCE for Iervolino Entertainment 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 Iervolino Entertainment here for free.

What Does the ROCE Trend For Iervolino Entertainment Tell Us?

In terms of Iervolino Entertainment's historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 48% where it was two years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Iervolino Entertainment has done well to pay down its current liabilities to 47% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

What We Can Learn From Iervolino Entertainment's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Iervolino Entertainment is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 58% over the last year, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

Iervolino Entertainment does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are potentially serious...

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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