Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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, Formula One Group (NASDAQ:FWON.K) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Formula One Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.019 = US$198m ÷ (US$12b - US$1.2b) (Based on the trailing twelve months to June 2022).
Therefore, Formula One Group has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 5.1%.
Check out our latest analysis for Formula One Group
Above you can see how the current ROCE for Formula One Group 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 Formula One Group.
The Trend Of ROCE
We're delighted to see that Formula One Group is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 1.9% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
The Key Takeaway
In summary, we're delighted to see that Formula One Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 63% return over the last five years. In light of that, we think it's worth looking further into this stock because if Formula One Group can keep these trends up, it could have a bright future ahead.