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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at 37 Interactive Entertainment Network Technology Group (SZSE:002555) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. To calculate this metric for 37 Interactive Entertainment Network Technology Group, this is the formula:

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

0.19 = CN¥2.7b ÷ (CN¥21b - CN¥6.9b) (Based on the trailing twelve months to March 2024).

Thus, 37 Interactive Entertainment Network Technology Group has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Entertainment industry average of 5.4% it's much better.

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'd like, you can check out the forecasts from the analysts covering 37 Interactive Entertainment Network Technology Group for free.

What Does the ROCE Trend For 37 Interactive Entertainment Network Technology Group Tell Us?

When we looked at the ROCE trend at 37 Interactive Entertainment Network Technology Group, we didn't gain much confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 19%. However it looks like 37 Interactive Entertainment Network Technology Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, 37 Interactive Entertainment Network Technology Group's current liabilities have increased over the last five years to 33% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 19%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by 37 Interactive Entertainment Network Technology Group's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 14% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing 37 Interactive Entertainment Network Technology Group, we've discovered 1 warning sign that you should be aware of.

While 37 Interactive Entertainment Network Technology Group 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.

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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.

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