Did you know there are some financial metrics that can provide clues of a potential 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Square Enix Holdings' (TSE:9684) trend of ROCE, we liked what we saw.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Square Enix Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = JP¥40b ÷ (JP¥413b - JP¥76b) (Based on the trailing twelve months to June 2024).
Therefore, Square Enix Holdings has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Entertainment industry.
View our latest analysis for Square Enix Holdings
In the above chart we have measured Square Enix Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Square Enix Holdings .
The Trend Of ROCE
While the current returns on capital are decent, they haven't changed much. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 56% in that time. 12% is a pretty standard return, and it provides some comfort knowing that Square Enix Holdings has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
In Conclusion...
To sum it up, Square Enix Holdings has simply been reinvesting capital steadily, at those decent rates of return. In light of this, the stock has only gained 31% over the last five years for shareholders who have owned the stock in this period. So to determine if Square Enix Holdings is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
Like most companies, Square Enix Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
About TSE:9684
Square Enix Holdings
Operates in the content and service businesses in Japan and internationally.
Flawless balance sheet with moderate growth potential.
