Exploring investment opportunities for significant long-term growth involves identifying key trends in a company’s financial performance. Two critical indicators are return on capital employed (ROCE) growth and capital employed expansion. These metrics suggest a company’s ability to effectively reinvest its earnings to generate higher returns. However, a closer look at Caesars Entertainment (NASDAQ:CZR) reveals that it may not possess the traits typically associated with exponential stock growth.
Understanding Return on Capital Employed (ROCE)
ROCE is a crucial metric that evaluates a company’s profitability in relation to the capital it uses. The formula used to determine Caesars Entertainment’s ROCE is:
Return on capital employed = Earnings before interest and taxes (EBIT) (Total assets – Current liabilities)
With EBIT of $2.4 billion and capital employed estimated at approximately $30.4 billion, Caesars’ ROCE stands at 7.9% based on the trailing twelve months to June 2024. This figure is significantly lower than the average hotel industry ROCE of 11%.
ROCE Trends at Caesars Entertainment
Over the past five years, Caesars Entertainment’s ROCE has stagnated at around 7.9%, despite a significant 435% increase in capital employed. This suggests that the increased investments the company has made have not produced proportionately higher returns. This static rate of return, combined with a substantial increase in capital, points to inefficiencies in how investments are producing profits.
Implications of Caesars Entertainment’s Financial Strategies
The flat ROCE trajectory, despite rising capital investment, suggests that Caesars Entertainment’s strategies may not yield the high returns investors typically seek for the potential multi-bagger. The market has responded accordingly, with the company’s share price declining 15% over the past five years.