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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Event Hospitality & Entertainment (ASX:EVT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Event Hospitality & Entertainment, this is the formula:

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

0.044 = AU$95m ÷ (AU$2.6b - AU$455m) (Based on the trailing twelve months to June 2022).

Therefore, Event Hospitality & Entertainment has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 9.0%.

Check out our latest analysis for Event Hospitality & Entertainment

Above you can see how the current ROCE for Event Hospitality & Entertainment compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Event Hospitality & Entertainment here for free.

So How Is Event Hospitality & Entertainment's ROCE Trending?

In terms of Event Hospitality & Entertainment's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.4% from 15% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Event Hospitality & Entertainment has decreased its current liabilities to 17% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.