Returns On Capital At Movie Games (WSE:MOV) Paint A Concerning Picture
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Movie Games (WSE:MOV) and its ROCE trend, we weren't exactly thrilled.
Understanding 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 Movie Games, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.018 = zł669k ÷ (zł39m - zł3.3m) (Based on the trailing twelve months to September 2024).
Therefore, Movie Games has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 16%.
View our latest analysis for Movie Games
Historical performance is a great place to start when researching a stock so above you can see the gauge for Movie Games' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Movie Games.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Movie Games doesn't inspire confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 1.8%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that Movie Games is reinvesting for growth and has higher sales as a result. Despite these promising trends, the stock has collapsed 90% over the last five years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.
If you'd like to know more about Movie Games, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.
While Movie Games 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.