Here's What To Make Of Shemaroo Entertainment's (NSE:SHEMAROO) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Shemaroo Entertainment (NSE:SHEMAROO), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Shemaroo Entertainment is:

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

0.052 = ₹321m ÷ (₹9.0b - ₹2.8b) (Based on the trailing twelve months to June 2020).

So, Shemaroo Entertainment has an ROCE of 5.2%. Even though it's in line with the industry average of 5.4%, it's still a low return by itself.

Check out our latest analysis for Shemaroo Entertainment

In the above chart we have measured Shemaroo Entertainment'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 report on analyst forecasts for the company.

What Does the ROCE Trend For Shemaroo Entertainment Tell Us?

On the surface, the trend of ROCE at Shemaroo Entertainment doesn't inspire confidence. To be more specific, ROCE has fallen from 27% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

In summary, we're somewhat concerned by Shemaroo Entertainment's diminishing returns on increasing amounts of capital. This could explain why the stock has sunk a total of 76% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Shemaroo Entertainment does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those can't be ignored...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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.
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