The Returns At Shemaroo Entertainment (NSE:SHEMAROO) Provide Us With Signs Of What's To Come

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Shemaroo Entertainment (NSE:SHEMAROO), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Shemaroo Entertainment, this is the formula:

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

0.005 = ₹30m ÷ (₹9.2b - ₹3.2b) (Based on the trailing twelve months to September 2020).

Thus, Shemaroo Entertainment has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 3.6%.

See 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'd like to see what analysts are forecasting going forward, you should check out our free report for Shemaroo Entertainment.

What The Trend Of ROCE Can Tell Us

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 24%, but since then they've fallen to 0.5%. 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.

Our Take On Shemaroo Entertainment's ROCE

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. We expect this has contributed to the stock plummeting 71% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Shemaroo Entertainment (of which 1 shouldn't be ignored!) that you should know about.

While Shemaroo Entertainment may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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