To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Endeavor Group Holdings (NYSE:EDR) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
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. Analysts use this formula to calculate it for Endeavor Group Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0038 = US$35m ÷ (US$11b - US$2.0b) (Based on the trailing twelve months to March 2022).
Therefore, Endeavor Group Holdings has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 6.9%.
Above you can see how the current ROCE for Endeavor Group Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Endeavor Group Holdings Tell Us?
Endeavor Group Holdings has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses four years ago, but now it's earning 0.4% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Endeavor Group Holdings is utilizing 23% more capital than it was four years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
The Bottom Line On Endeavor Group Holdings' ROCE
To the delight of most shareholders, Endeavor Group Holdings has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 21% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Endeavor Group Holdings (of which 1 is significant!) that you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.