PlaySide Studios (ASX:PLY) Hasn't Managed To Accelerate Its Returns

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, the ROCE of PlaySide Studios (ASX:PLY) looks decent, right now, so lets see what the trend of returns can tell us.

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. To calculate this metric for PlaySide Studios, this is the formula:

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

0.12 = AU$5.7m ÷ (AU$55m - AU$7.9m) (Based on the trailing twelve months to June 2022).

Therefore, PlaySide Studios has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Entertainment industry average of 11%.

View our latest analysis for PlaySide Studios

In the above chart we have measured PlaySide Studios' 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 PlaySide Studios here for free.

The Trend Of ROCE

While the returns on capital are good, they haven't moved much. Over the past three years, ROCE has remained relatively flat at around 12% and the business has deployed 2,319% more capital into its operations. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, PlaySide Studios has done well to reduce current liabilities to 14% of total assets over the last three years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On PlaySide Studios' ROCE

The main thing to remember is that PlaySide Studios has proven its ability to continually reinvest at respectable rates of return. However, despite the favorable fundamentals, the stock has fallen 53% over the last year, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

If you'd like to know about the risks facing PlaySide Studios, we've discovered 1 warning sign that you should be aware of.

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. 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.