Shemaroo Entertainment (NSE:SHEMAROO) Will Want To Turn Around Its Return Trends

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Shemaroo Entertainment (NSE:SHEMAROO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Shemaroo Entertainment is:

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

0.0089 = ₹53m ÷ (₹8.8b - ₹2.8b) (Based on the trailing twelve months to March 2021).

So, Shemaroo Entertainment has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 2.4%.

View our latest analysis for Shemaroo Entertainment

Above you can see how the current ROCE for Shemaroo Entertainment compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Shemaroo Entertainment's ROCE Trending?

When we looked at the ROCE trend at Shemaroo Entertainment, we didn't gain much confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 0.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Shemaroo Entertainment have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 56% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Shemaroo Entertainment, we've spotted 4 warning signs, and 2 of them are a bit unpleasant.

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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