SD ENTERTAINMENTInc (TSE:4650) Might Have The Makings Of A Multi-Bagger

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in SD ENTERTAINMENTInc's (TSE:4650) returns on capital, so let's have a look.

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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. The formula for this calculation on SD ENTERTAINMENTInc is:

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

0.072 = JP¥158m ÷ (JP¥4.2b - JP¥2.0b) (Based on the trailing twelve months to December 2024).

Thus, SD ENTERTAINMENTInc has an ROCE of 7.2%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.8%.

Check out our latest analysis for SD ENTERTAINMENTInc

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 , check out these free graphs detailing revenue and cash flow performance of SD ENTERTAINMENTInc.

The Trend Of ROCE

Like most people, we're pleased that SD ENTERTAINMENTInc is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 7.2% on their capital employed. In regards to capital employed, SD ENTERTAINMENTInc is using 47% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

On a side note, SD ENTERTAINMENTInc's current liabilities are still rather high at 48% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On SD ENTERTAINMENTInc's ROCE

From what we've seen above, SD ENTERTAINMENTInc has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 25% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we found 3 warning signs for SD ENTERTAINMENTInc (1 makes us a bit uncomfortable) you should be aware of.

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.