If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at 37 Interactive Entertainment Network Technology Group's (SZSE:002555) ROCE trend, we were very happy with what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for 37 Interactive Entertainment Network Technology Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = CN¥3.1b ÷ (CN¥19b - CN¥5.9b) (Based on the trailing twelve months to September 2023).
So, 37 Interactive Entertainment Network Technology Group has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 4.5%.
In the above chart we have measured 37 Interactive Entertainment Network Technology Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for 37 Interactive Entertainment Network Technology Group .
How Are Returns Trending?
We'd be pretty happy with returns on capital like 37 Interactive Entertainment Network Technology Group. Over the past five years, ROCE has remained relatively flat at around 24% and the business has deployed 92% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If 37 Interactive Entertainment Network Technology Group can keep this up, we'd be very optimistic about its future.
What We Can Learn From 37 Interactive Entertainment Network Technology Group's ROCE
In summary, we're delighted to see that 37 Interactive Entertainment Network Technology Group has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Therefore it's no surprise that shareholders have earned a respectable 46% return if they held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
One more thing to note, we've identified 1 warning sign with 37 Interactive Entertainment Network Technology Group and understanding this should be part of your investment process.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.