Returns on Capital Paint A Bright Future For Basilic Fly Studio (NSE:BASILIC)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Basilic Fly Studio's (NSE:BASILIC) returns on capital, so let's have a look.

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 Basilic Fly Studio, this is the formula:

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

0.38 = ₹480m ÷ (₹1.4b - ₹159m) (Based on the trailing twelve months to March 2024).

So, Basilic Fly Studio has an ROCE of 38%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 5.0%.

See our latest analysis for Basilic Fly Studio

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Basilic Fly Studio has performed in the past in other metrics, you can view this free graph of Basilic Fly Studio's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Basilic Fly Studio is displaying some positive trends. The numbers show that in the last three years, the returns generated on capital employed have grown considerably to 38%. The amount of capital employed has increased too, by 3,441%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 11%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On Basilic Fly Studio's ROCE

All in all, it's terrific to see that Basilic Fly Studio is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 46% return over the last year. In light of that, we think it's worth looking further into this stock because if Basilic Fly Studio can keep these trends up, it could have a bright future ahead.

Basilic Fly Studio does have some risks though, and we've spotted 1 warning sign for Basilic Fly Studio that you might be interested in.

Basilic Fly Studio is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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

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.