In This Article:
Today we'll look at Event Hospitality & Entertainment Limited (ASX:EVT) and reflect on its potential as an investment. 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.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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:
0.094 = AU$145m ÷ (AU$1.8b - AU$241m) (Based on the trailing twelve months to June 2019.)
So, Event Hospitality & Entertainment has an ROCE of 9.4%.
Check out our latest analysis for Event Hospitality & Entertainment
Is Event Hospitality & Entertainment's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Event Hospitality & Entertainment's ROCE is around the 9.7% average reported by the Entertainment industry. Separate from how Event Hospitality & Entertainment stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
Event Hospitality & Entertainment's current ROCE of 9.4% is lower than 3 years ago, when the company reported a 15% ROCE. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how Event Hospitality & Entertainment's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.