Some Investors May Be Worried About Iervolino & Lady Bacardi Entertainment's (BIT:IE) 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? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Looking at Iervolino & Lady Bacardi Entertainment (BIT:IE), it does have a high ROCE right now, but lets see how returns are trending.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.25 = €25m ÷ (€158m - €59m) (Based on the trailing twelve months to June 2021).

Therefore, Iervolino & Lady Bacardi Entertainment has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 10%.

View 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.

So How Is Iervolino & Lady Bacardi Entertainment's ROCE Trending?

When we looked at the ROCE trend at Iervolino & Lady Bacardi Entertainment, we didn't gain much confidence. Historically returns on capital were even higher at 48%, but they have dropped over the last three years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Iervolino & Lady Bacardi Entertainment has decreased its current liabilities to 37% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

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

While returns have fallen for Iervolino & Lady Bacardi Entertainment in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 27% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 5 warning signs with Iervolino & Lady Bacardi Entertainment (at least 2 which can't be ignored) , and understanding these would certainly be useful.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.