What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Lionsgate Studios (NASDAQ:LION) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Lionsgate Studios is:

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

0.09 = US$158m ÷ (US$5.3b - US$3.5b) (Based on the trailing twelve months to September 2024).

So, Lionsgate Studios has an ROCE of 9.0%. In absolute terms, that's a low return but it's around the Entertainment industry average of 9.9%.

In the above chart we have measured Lionsgate Studios' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Lionsgate Studios .

What Can We Tell From Lionsgate Studios' ROCE Trend?

We're pretty happy with how the ROCE has been trending at Lionsgate Studios. The data shows that returns on capital have increased by 56% over the trailing three years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Lionsgate Studios appears to been achieving more with less, since the business is using 26% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 67% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

In the end, Lionsgate Studios has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 24% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 3 warning signs with Lionsgate Studios (at least 2 which are a bit unpleasant) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.