If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Highlight Event and Entertainment's (VTX:HLEE) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Highlight Event and Entertainment, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0017 = CHF506k ÷ (CHF828m - CHF534m) (Based on the trailing twelve months to June 2024).
So, Highlight Event and Entertainment has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 12%.
See our latest analysis for Highlight Event and Entertainment
Historical performance is a great place to start when researching a stock so above you can see the gauge for Highlight Event and Entertainment's ROCE against it's prior returns. If you're interested in investigating Highlight Event and Entertainment's past further, check out this free graph covering Highlight Event and Entertainment's past earnings, revenue and cash flow.
So How Is Highlight Event and Entertainment's ROCE Trending?
We're delighted to see that Highlight Event and Entertainment is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Highlight Event and Entertainment is using 44% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
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 64% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.