What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Speaking of which, we noticed some great changes in Vivid Seats' (NASDAQ:SEAT) returns on capital, so let's have a look.

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. To calculate this metric for Vivid Seats, this is the formula:

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

0.053 = US$63m ÷ (US$1.7b - US$470m) (Based on the trailing twelve months to June 2024).

Thus, Vivid Seats has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 11%.

View our latest analysis for Vivid Seats

In the above chart we have measured Vivid Seats' 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 Vivid Seats .

The Trend Of ROCE

We're delighted to see that Vivid Seats is reaping rewards from its investments and has now broken into profitability. The company now earns 5.3% on its capital, because four years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. 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. Because in the end, a business can only get so efficient.

What We Can Learn From Vivid Seats' ROCE

As discussed above, Vivid Seats appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 64% in the last three years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to continue researching Vivid Seats, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Vivid Seats 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.