Returns At CD Projekt (WSE:CDR) Are On The Way Up

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at CD Projekt (WSE:CDR) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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 CD Projekt is:

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

0.16 = zł408m ÷ (zł2.8b - zł161m) (Based on the trailing twelve months to September 2024).

Thus, CD Projekt has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 18% generated by the Entertainment industry.

View our latest analysis for CD Projekt

In the above chart we have measured CD Projekt's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering CD Projekt for free.

So How Is CD Projekt's ROCE Trending?

The trends we've noticed at CD Projekt are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 16%. The amount of capital employed has increased too, by 159%. So we're very much inspired by what we're seeing at CD Projekt thanks to its ability to profitably reinvest capital.

One more thing to note, CD Projekt has decreased current liabilities to 5.9% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line

All in all, it's terrific to see that CD Projekt is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 16% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for CDR that compares the share price and estimated value.

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.