Investors Will Want SM Entertainment's (KOSDAQ:041510) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So on that note, SM Entertainment (KOSDAQ:041510) looks quite promising in regards to its trends of return on capital.

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Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for SM Entertainment:

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

0.091 = ₩85b ÷ (₩1.4t - ₩485b) (Based on the trailing twelve months to December 2024).

So, SM Entertainment has an ROCE of 9.1%. In absolute terms, that's a low return, but it's much better than the Entertainment industry average of 6.1%.

View our latest analysis for SM Entertainment

Above you can see how the current ROCE for SM Entertainment compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for SM Entertainment .

What Does the ROCE Trend For SM Entertainment Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 9.1%. The amount of capital employed has increased too, by 38%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

All in all, it's terrific to see that SM Entertainment is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 380% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if SM Entertainment can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for SM Entertainment that we think you should be aware of.

While SM 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.