Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 while 11 bit studios (WSE:11B) has a high ROCE right now, lets see what we can decipher from how returns are changing.
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 11 bit studios:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = zł41m ÷ (zł186m - zł11m) (Based on the trailing twelve months to December 2020).
Thus, 11 bit studios has an ROCE of 23%. In absolute terms that's a very respectable return and compared to the Entertainment industry average of 22% it's pretty much on par.
Above you can see how the current ROCE for 11 bit studios compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering 11 bit studios here for free.
The Trend Of ROCE
When we looked at the ROCE trend at 11 bit studios, we didn't gain much confidence. Historically returns on capital were even higher at 48%, but they have dropped over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that 11 bit studios is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 592% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.
If you want to know some of the risks facing 11 bit studios we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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