37 Interactive Entertainment Network Technology Group (SZSE:002555) Will Want To Turn Around Its Return Trends

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating 37 Interactive Entertainment Network Technology Group (SZSE:002555), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for 37 Interactive Entertainment Network Technology Group:

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).

Therefore, 37 Interactive Entertainment Network Technology Group has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 5.4% generated by the Entertainment industry.

View our latest analysis for 37 Interactive Entertainment Network Technology Group

Above you can see how the current ROCE for 37 Interactive Entertainment Network Technology Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering 37 Interactive Entertainment Network Technology Group for free.

How Are Returns Trending?

On the surface, the trend of ROCE at 37 Interactive Entertainment Network Technology Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 19% from 26% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Key Takeaway

To conclude, we've found that 37 Interactive Entertainment Network Technology Group is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 14% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances 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 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.

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