LeoVegas (STO:LEO) Shareholders Will Want The ROCE Trajectory To Continue

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. So when we looked at LeoVegas (STO:LEO) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for LeoVegas:

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

0.17 = €26m ÷ (€249m - €96m) (Based on the trailing twelve months to December 2020).

So, LeoVegas has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 11% generated by the Hospitality industry.

View our latest analysis for LeoVegas

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

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from LeoVegas. The data shows that returns on capital have increased substantially over the last five years to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 761% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From LeoVegas' ROCE

To sum it up, LeoVegas has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 31% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

One more thing, we've spotted 3 warning signs facing LeoVegas that you might find interesting.

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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