We Like These Underlying Return On Capital Trends At SD ENTERTAINMENTInc (TSE:4650)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at SD ENTERTAINMENTInc (TSE:4650) so let's look a bit deeper.

What Is 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 SD ENTERTAINMENTInc is:

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

0.064 = JP¥131m ÷ (JP¥4.0b - JP¥1.9b) (Based on the trailing twelve months to December 2023).

So, SD ENTERTAINMENTInc has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 8.6%.

View our latest analysis for SD ENTERTAINMENTInc

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

What Does the ROCE Trend For SD ENTERTAINMENTInc Tell Us?

You'd find it hard not to be impressed with the ROCE trend at SD ENTERTAINMENTInc. The figures show that over the last five years, returns on capital have grown by 128%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 68% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 49% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

In summary, it's great to see that SD ENTERTAINMENTInc has been able to turn things around and earn higher returns on lower amounts of capital. Given the stock has declined 40% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing: We've identified 4 warning signs with SD ENTERTAINMENTInc (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

While SD ENTERTAINMENTInc 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.