Returns On Capital At Mgame (KOSDAQ:058630) Paint An Interesting Picture

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Mgame's (KOSDAQ:058630) trend of ROCE, we 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. Analysts use this formula to calculate it for Mgame:

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

0.19 = ₩9.7b ÷ (₩55b - ₩4.7b) (Based on the trailing twelve months to September 2020).

Therefore, Mgame has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Entertainment industry average of 8.1% it's much better.

See our latest analysis for Mgame

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

What Does the ROCE Trend For Mgame Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 72% more capital in the last five years, and the returns on that capital have remained stable at 19%. Since 19% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Mgame has done well to reduce current liabilities to 8.5% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

The main thing to remember is that Mgame has proven its ability to continually reinvest at respectable rates of return. In light of this, the stock has only gained 33% over the last five years for shareholders who have owned the stock in this period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

One more thing, we've spotted 1 warning sign facing Mgame that you might find interesting.

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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