Stock Analysis

Caesars Entertainment (NASDAQ:CZR) Will Want To Turn Around Its Return Trends

NasdaqGS:CZR
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Caesars Entertainment (NASDAQ:CZR), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. To calculate this metric for Caesars Entertainment, this is the formula:

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

0.045 = US$1.4b ÷ (US$37b - US$5.1b) (Based on the trailing twelve months to March 2022).

Therefore, Caesars Entertainment has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 10%.

View our latest analysis for Caesars Entertainment

roce
NasdaqGS:CZR Return on Capital Employed August 1st 2022

In the above chart we have measured Caesars Entertainment's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Caesars Entertainment here for free.

What Can We Tell From Caesars Entertainment's ROCE Trend?

On the surface, the trend of ROCE at Caesars Entertainment doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.5% from 6.1% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Caesars Entertainment. And the stock has done incredibly well with a 125% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you're still interested in Caesars Entertainment it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Caesars 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.

Valuation is complex, but we're helping make it simple.

Find out whether Caesars 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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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.