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Evolution Gaming Group AB (publ) (STO:EVO) Earns Among The Best Returns In Its Industry

Gavin Beck

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Today we’ll evaluate Evolution Gaming Group AB (publ) (STO:EVO) to determine whether it could have potential as an investment idea. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for Evolution Gaming Group:

0.53 = €89m ÷ (€241m – €73m) (Based on the trailing twelve months to December 2018.)

So, Evolution Gaming Group has an ROCE of 53%.

View our latest analysis for Evolution Gaming Group

Does Evolution Gaming Group Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In our analysis, Evolution Gaming Group’s ROCE is meaningfully higher than the 19% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Evolution Gaming Group’s ROCE in absolute terms currently looks quite high.

OM:EVO Past Revenue and Net Income, February 19th 2019

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Evolution Gaming Group.

What Are Current Liabilities, And How Do They Affect Evolution Gaming Group’s ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

Evolution Gaming Group has total liabilities of €73m and total assets of €241m. Therefore its current liabilities are equivalent to approximately 30% of its total assets. A medium level of current liabilities boosts Evolution Gaming Group’s ROCE somewhat.

Our Take On Evolution Gaming Group’s ROCE

Still, it has a high ROCE, and may be an interesting prospect for further research. But note: Evolution Gaming Group may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. On rare occasion, data errors may occur. Thank you for reading.