Should Flutter Entertainment PLC’s (ISE:FLTR) Weak Investment Returns Worry You?

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Today we are going to look at Flutter Entertainment PLC (ISE:FLTR) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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 Flutter Entertainment:

0.056 = UK£260m ÷ (UK£5.2b - UK£578m) (Based on the trailing twelve months to December 2018.)

Therefore, Flutter Entertainment has an ROCE of 5.6%.

Check out our latest analysis for Flutter Entertainment

Does Flutter Entertainment Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Flutter Entertainment's ROCE appears meaningfully below the 8.3% average reported by the Hospitality industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Aside from the industry comparison, Flutter Entertainment's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

Flutter Entertainment's current ROCE of 5.6% is lower than its ROCE in the past, which was 53%, 3 years ago. Therefore we wonder if the company is facing new headwinds.

ISE:FLTR Past Revenue and Net Income, June 25th 2019
ISE:FLTR Past Revenue and Net Income, June 25th 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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Flutter Entertainment.

What Are Current Liabilities, And How Do They Affect Flutter Entertainment'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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Flutter Entertainment has total assets of UK£5.2b and current liabilities of UK£578m. Therefore its current liabilities are equivalent to approximately 11% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

Our Take On Flutter Entertainment's ROCE

That said, Flutter Entertainment's ROCE is mediocre, there may be more attractive investments around. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

I will like Flutter Entertainment better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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. Thank you for reading.