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Euronet Worldwide (NASDAQ:EEFT) May Have Issues Allocating Its Capital

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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Euronet Worldwide (NASDAQ:EEFT), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Euronet Worldwide, this is the formula:

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

0.067 = US$210m ÷ (US$4.9b - US$1.8b) (Based on the trailing twelve months to March 2022).

So, Euronet Worldwide has an ROCE of 6.7%. In absolute terms, that's a low return and it also under-performs the IT industry average of 12%.

View our latest analysis for Euronet Worldwide

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roce

Above you can see how the current ROCE for Euronet Worldwide compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Euronet Worldwide.

How Are Returns Trending?

On the surface, the trend of ROCE at Euronet Worldwide doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Euronet Worldwide's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Euronet Worldwide is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 34% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One more thing, we've spotted 1 warning sign facing Euronet Worldwide that you might find interesting.

While Euronet Worldwide may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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