Returns On Capital Are Showing Encouraging Signs At Endeavor Group Holdings (NYSE:EDR)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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 on that note, Endeavor Group Holdings (NYSE:EDR) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Endeavor Group Holdings is:

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

0.059 = US$564m ÷ (US$12b - US$2.3b) (Based on the trailing twelve months to September 2022).

Therefore, Endeavor Group Holdings has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 8.4%.

View our latest analysis for Endeavor Group Holdings

In the above chart we have measured Endeavor Group Holdings' 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 Endeavor Group Holdings here for free.

What Does the ROCE Trend For Endeavor Group Holdings Tell Us?

The fact that Endeavor Group Holdings is now generating some pre-tax profits from its prior investments is very encouraging. About four years ago the company was generating losses but things have turned around because it's now earning 5.9% on its capital. And unsurprisingly, like most companies trying to break into the black, Endeavor Group Holdings is utilizing 23% more capital than it was four years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

What We Can Learn From Endeavor Group Holdings' ROCE

Long story short, we're delighted to see that Endeavor Group Holdings' reinvestment activities have paid off and the company is now profitable. Given the stock has declined 28% in the last year, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Endeavor Group Holdings does have some risks, we noticed 4 warning signs (and 1 which is significant) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.