Stock Analysis

There Are Reasons To Feel Uneasy About Iervolino & Lady Bacardi Entertainment's (BIT:IE) Returns On Capital

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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Iervolino & Lady Bacardi Entertainment (BIT:IE), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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 Iervolino & Lady Bacardi Entertainment, this is the formula:

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

0.15 = €18m ÷ (€186m - €69m) (Based on the trailing twelve months to June 2022).

Thus, Iervolino & Lady Bacardi Entertainment has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Entertainment industry.

See our latest analysis for Iervolino & Lady Bacardi Entertainment

BIT:IE Return on Capital Employed March 17th 2023

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 report for Iervolino & Lady Bacardi Entertainment.

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. Around four years ago the returns on capital were 48%, but since then they've fallen to 15%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Iervolino & Lady Bacardi Entertainment has done well to pay down 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Iervolino & Lady Bacardi Entertainment's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Iervolino & Lady Bacardi Entertainment have fallen, meanwhile the business is employing more capital than it was four years ago. Long term shareholders who've owned the stock over the last three years have experienced a 58% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Iervolino & Lady Bacardi Entertainment (of which 1 is potentially serious!) that you should know about.

While Iervolino & Lady Bacardi Entertainment isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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Find out whether Iervolino & Lady Bacardi Entertainment is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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