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Today we'll evaluate Event Hospitality & Entertainment Limited (ASX:EVT) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Event Hospitality & Entertainment:
0.11 = AU$174m ÷ (AU$1.8b - AU$255m) (Based on the trailing twelve months to December 2018.)
Therefore, Event Hospitality & Entertainment has an ROCE of 11%.
View our latest analysis for Event Hospitality & Entertainment
Does Event Hospitality & Entertainment Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. It appears that Event Hospitality & Entertainment's ROCE is fairly close to the Entertainment industry average of 10%. Independently of how Event Hospitality & Entertainment compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Event Hospitality & Entertainment's current ROCE of 11% is lower than 3 years ago, when the company reported a 15% ROCE. This makes us wonder if the business is facing new challenges.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Event Hospitality & Entertainment.