Caesars Entertainment's (NASDAQ:CZR) Returns On Capital Not Reflecting Well On The Business

If you're looking for a multi-bagger, there's a few things to 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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)?

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 Caesars Entertainment:

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

0.042 = US$1.4b ÷ (US$39b - US$5.0b) (Based on the trailing twelve months to September 2021).

Therefore, Caesars Entertainment has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 8.5%.

Check out our latest analysis for Caesars Entertainment

Above you can see how the current ROCE for Caesars Entertainment compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Caesars Entertainment.

So How Is Caesars Entertainment's ROCE Trending?

In terms of Caesars Entertainment's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.2% from 8.4% 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.

Our Take On Caesars 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 Caesars Entertainment. And the stock has done incredibly well with a 693% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we've found 2 warning signs for Caesars Entertainment that we think you should be aware of.

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.

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.

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