Did you know that certain financial measures can provide clues about a possible multi-bagger? Generally, we will want to notice a growing trend return on capital employed (ROCE) and at the same time, a based capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. So during 11-bit studios (WSE: 11B) has a high ROCE right now, let’s see what we can decipher from the evolution of returns.
Return on capital employed (ROCE): what is it?
If you’ve never worked with ROCE before, it measures the “ return ” (profit before tax) that a business generates from the capital employed in its business. Analysts use this formula to calculate it for 11-bit studios:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.23 = zł41m ÷ (zł186m – zł11m) (Based on the last twelve months up to December 2020).
So, 11-bit studios have 23% ROCE. In absolute terms, that’s a very respectable return and compared to the entertainment industry average of 22%, that’s about the same level.
See our latest review for 11-bit studios
Above you can see how the current 11-bit studios ROCE compares to its past returns on capital, but you can’t say more about the past. If you want, you can check out analyst forecasts covering 11-bit studios here for free.
The ROCE trend
When we looked at the trend for ROCE in 11-bit studios, we didn’t gain much confidence. Historically, returns on capital were even higher at 48%, but they have declined over the past five years. However, as both capital employed and income have increased, it appears the company is currently continuing to grow, driven by short-term returns. If these investments prove to be successful, it can bode very well for long-term stock performance.
The Bottom Line
In summary, despite lower returns in the short term, we are encouraged to see 11-bit studios reinvesting for growth and consequently registering higher sales. And the stock has performed incredibly well with a return of 592% over the past five years, so long-term investors are no doubt delighted with the result. So if these growth trends continue, we would be optimistic about the future.
If you want to know some of the risks 11-bit studios face, we’ve found 2 warning signs (1 makes us a little uncomfortable!) Which you should be aware of before investing here.
If you’d like to see other companies driving high returns, check out our free List of high yielding companies with strong balance sheets here.
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