Yahoo Finance Investors Will Want Formula One Group's (NASDAQ:FWON.K) Growth In ROCE To Persist
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Formula One Group (NASDAQ:FWON.K) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Formula One Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.04 = US$385m ÷ (US$11b - US$1.1b) (Based on the trailing twelve months to March 2024).
Therefore, Formula One Group has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 8.8%.
See our latest analysis for Formula One Group
Above you can see how the current ROCE for Formula One Group 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 Formula One Group for free.
What The Trend Of ROCE Can Tell Us
Shareholders will be relieved that Formula One Group has broken into profitability. The company now earns 4.0% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Formula One Group has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
The Bottom Line On Formula One Group's ROCE
To bring it all together, Formula One Group has done well to increase the returns it's generating from its capital employed. And a remarkable 101% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Formula One Group can keep these trends up, it could have a bright future ahead.
Like most companies, Formula One Group does come with some risks, and we've found 2 warning signs that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
