What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Caesars Entertainment (NASDAQ:CZR), it didn't seem to tick all of these boxes.
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. The formula for this calculation on Caesars Entertainment is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.079 = US$2.4b ÷ (US$33b - US$2.6b) (Based on the trailing twelve months to June 2024).
Thus, Caesars Entertainment has an ROCE of 7.9%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 10%.
In the above chart we have measured Caesars Entertainment's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Caesars Entertainment .
How Are Returns Trending?
In terms of Caesars Entertainment's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 7.9% for the last five years, and the capital employed within the business has risen 435% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
Our Take On Caesars Entertainment's ROCE
As we've seen above, Caesars Entertainment's returns on capital haven't increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 14% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
If you're still interested in Caesars Entertainment it's worth checking out our FREE intrinsic value approximation for CZR to see if it's trading at an attractive price in other respects.
While Caesars Entertainment isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.