Vivid Seats (NASDAQ:SEAT) Is Looking To Continue Growing Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Vivid Seats' (NASDAQ:SEAT) returns on capital, so let's have a look.

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

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. The formula for this calculation on Vivid Seats is:

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

0.14 = US$111m ÷ (US$1.2b - US$405m) (Based on the trailing twelve months to September 2022).

So, Vivid Seats has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Online Retail industry average of 12% it's much better.

Check out our latest analysis for Vivid Seats

Above you can see how the current ROCE for Vivid Seats 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 Vivid Seats.

What Does the ROCE Trend For Vivid Seats Tell Us?

Vivid Seats has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 14% on its capital, because two years ago it was incurring losses. While returns have increased, the amount of capital employed by Vivid Seats has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 34% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line On Vivid Seats' ROCE

In summary, we're delighted to see that Vivid Seats has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 36% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, Vivid Seats does come with some risks, and we've found 2 warning signs that you should be aware of.

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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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.