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

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Iervolino & Lady Bacardi Entertainment (BIT:IE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Iervolino & Lady Bacardi Entertainment is:

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

0.039 = €5.2m ÷ (€213m - €79m) (Based on the trailing twelve months to June 2023).

Thus, Iervolino & Lady Bacardi Entertainment has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 9.4%.

See our latest analysis for Iervolino & Lady Bacardi Entertainment

In the above chart we have measured Iervolino & Lady Bacardi Entertainment's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Iervolino & Lady Bacardi Entertainment .

How Are Returns Trending?

When we looked at the ROCE trend at Iervolino & Lady Bacardi Entertainment, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.9% from 48% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

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. 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.

The Bottom Line On Iervolino & Lady Bacardi Entertainment's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Iervolino & Lady Bacardi Entertainment. Despite these promising trends, the stock has collapsed 80% over the last three years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

If you want to know some of the risks facing Iervolino & Lady Bacardi Entertainment we've found 6 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.