Shemaroo Entertainment (NSE:SHEMAROO) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shemaroo Entertainment:

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

0.058 = ₹350m ÷ (₹9.5b - ₹3.5b) (Based on the trailing twelve months to September 2022).

Therefore, Shemaroo Entertainment has an ROCE of 5.8%. In absolute terms, that's a low return, but it's much better than the Entertainment industry average of 4.3%.

See our latest analysis for Shemaroo Entertainment

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shemaroo Entertainment's ROCE against it's prior returns. If you'd like to look at how Shemaroo Entertainment has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Shemaroo Entertainment's ROCE Trending?

When we looked at the ROCE trend at Shemaroo Entertainment, we didn't gain much confidence. To be more specific, ROCE has fallen from 27% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Shemaroo Entertainment's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shemaroo Entertainment. These growth trends haven't led to growth returns though, since the stock has fallen 61% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We've identified 4 warning signs with Shemaroo Entertainment (at least 3 which make us uncomfortable) , and understanding these would certainly be useful.

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.