Investors Should Be Encouraged By CI Games' (WSE:CIG) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 when we looked at the ROCE trend of CI Games (WSE:CIG) we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on CI Games is:

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

0.30 = zł44m ÷ (zł158m - zł12m) (Based on the trailing twelve months to March 2022).

Therefore, CI Games has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 20%.

Check out our latest analysis for CI Games

Above you can see how the current ROCE for CI Games 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 CI Games here for free.

How Are Returns Trending?

CI Games has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 30% on its capital. In addition to that, CI Games is employing 81% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 7.4%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that CI Games has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On CI Games' ROCE

In summary, it's great to see that CI Games has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a solid 48% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if CI Games can keep these trends up, it could have a bright future ahead.

On a final note, we found 2 warning signs for CI Games (1 is a bit concerning) you should be aware of.

CI Games is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.