International Game Technology (NYSE: IGT) Sees Growth in Return on Capital

There are a few key trends to look for if we are to identify the next multi-bagger. Ideally, a business will display two trends; first growth to return to on capital employed (ROCE) and on the other hand, an increase quantity capital employed. This shows us that it is a composing machine, capable of continually reinvesting its profits into the business and generating higher returns. So when we looked International gaming technology (NYSE: IGT) and its trend of ROCE, we really liked what we saw.

What is Return on Employee Capital (ROCE)?

If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. Analysts use this formula to calculate it for International Game Technology:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.085 = US $ 811 million ÷ (US $ 11 billion – US $ 1.8 billion) (Based on the last twelve months up to September 2021).

Therefore, International Game Technology has a ROCE of 8.5%. On its own, this is a low number but it sits around the 9.0% average generated by the hospitality industry.

NYSE: IGT Return on Capital Employed December 27, 2021

Above you can see how International Game Technology’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you want, you can view analyst forecasts covering International Game Technology here for free.

What the ROCE trend can tell us

You’d be hard pressed not to be impressed with the ROCE trend at International Game Technology. Data shows that returns on capital have increased by 50% over the past five years. This is not bad because it indicates that for every dollar invested (capital employed), the company increases the amount earned on that dollar. Speaking of capital employed, the company is actually using 26% less than it was five years ago, which may indicate that a company is improving its efficiency. If this trend continues, the business could become more efficient, but it is shrinking in terms of total assets.

The key to take away

From what we have seen above, International Game Technology has been successful in increasing its returns on capital while reducing its capital base. Investors may not yet be impressed with the favorable underlying trends, as over the past five years, the stock has only returned 35% to shareholders. So with that in mind, we believe the stock deserves further research.

Like most businesses, International Game Technology comes with certain risks, and we have found 1 warning sign that you need to be aware of.

Although International Game Technology does not generate the highest return, check out this free list of companies that generate high returns on equity with strong balance sheets.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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