What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Emerald Holding (NYSE:EEX) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. To calculate this metric for Emerald Holding, this is the formula:

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

0.062 = US$52m ÷ (US$1.1b - US$247m) (Based on the trailing twelve months to March 2024).

Therefore, Emerald Holding has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Media industry average of 11%.

See our latest analysis for Emerald Holding

In the above chart we have measured Emerald Holding'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 Emerald Holding for free.

What Does the ROCE Trend For Emerald Holding Tell Us?

Over the past five years, Emerald Holding's ROCE has remained relatively flat while the business is using 38% less capital than before. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. In addition to that, since the ROCE doesn't scream "quality" at 6.2%, it's hard to get excited about these developments.

The Bottom Line On Emerald Holding's ROCE

It's a shame to see that Emerald Holding is effectively shrinking in terms of its capital base. And in the last five years, the stock has given away 47% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Emerald Holding (of which 1 is a bit unpleasant!) that you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com