Be Wary Of Iervolino & Lady Bacardi Entertainment (BIT:IE) And Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Iervolino & Lady Bacardi Entertainment (BIT:IE) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Iervolino & Lady Bacardi Entertainment:

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

0.16 = €19m ÷ (€186m - €69m) (Based on the trailing twelve months to June 2022).

Thus, Iervolino & Lady Bacardi Entertainment has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Entertainment industry average of 8.1% it's much better.

See our latest analysis for Iervolino & Lady Bacardi Entertainment

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

What Can We Tell From Iervolino & Lady Bacardi Entertainment's ROCE Trend?

When we looked at the ROCE trend at Iervolino & Lady Bacardi Entertainment, we didn't gain much confidence. To be more specific, ROCE has fallen from 48% over the last four years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Iervolino & Lady Bacardi Entertainment has decreased its current liabilities to 37% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

We're a bit apprehensive about Iervolino & Lady Bacardi Entertainment because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 42% over the last three years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 4 warning signs with Iervolino & Lady Bacardi Entertainment (at least 2 which are potentially serious) , and understanding these would certainly be useful.

While Iervolino & Lady Bacardi Entertainment 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. 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.