The Returns On Capital At Shemaroo Entertainment (NSE:SHEMAROO) Don't Inspire Confidence

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. However, after briefly looking over the numbers, we don't think Shemaroo Entertainment (NSE:SHEMAROO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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

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

0.053 = ₹311m ÷ (₹8.9b - ₹3.0b) (Based on the trailing twelve months to March 2022).

Thus, Shemaroo Entertainment has an ROCE of 5.3%. On its own that's a low return, but compared to the average of 4.2% generated by the Entertainment industry, it's much better.

Check out our latest analysis for Shemaroo Entertainment

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 want to delve into the historical earnings, revenue and cash flow of Shemaroo Entertainment, check out these free graphs here.

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 28%, but since then they've fallen to 5.3%. 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.

The Bottom Line 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 68% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to know some of the risks facing Shemaroo Entertainment we've found 4 warning signs (2 can't be ignored!) that you should be aware of before investing here.

While Shemaroo Entertainment 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.