Returns At SM Entertainment (KOSDAQ:041510) Are On The Way Up

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. 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 looked at SM Entertainment (KOSDAQ:041510) and its trend of ROCE, we really liked what we saw.

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 SM Entertainment is:

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

0.11 = ₩113b ÷ (₩1.5t - ₩519b) (Based on the trailing twelve months to December 2023).

So, SM Entertainment has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Entertainment industry average of 7.4% it's much better.

View our latest analysis for SM Entertainment

In the above chart we have measured SM Entertainment's 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 SM Entertainment .

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from SM Entertainment. The data shows that returns on capital have increased substantially over the last five years to 11%. The amount of capital employed has increased too, by 68%. So we're very much inspired by what we're seeing at SM Entertainment thanks to its ability to profitably reinvest capital.

What We Can Learn From SM Entertainment's ROCE

In summary, it's great to see that SM Entertainment can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 101% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

If you want to continue researching SM Entertainment, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.