If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, the ROCE of CI Games (WSE:CIG) looks decent, right now, so lets see what the trend of returns can tell us.
Understanding 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)
0.16 = zł15m ÷ (zł103m - zł4.7m) (Based on the trailing twelve months to September 2020).
Therefore, CI Games has an ROCE of 16%. In isolation, that's a pretty standard return but against the Entertainment industry average of 22%, it's not as good.
View our latest analysis for CI Games
In the above chart we have measured CI Games' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for CI Games.
How Are Returns Trending?
While the returns on capital are good, they haven't moved much. The company has employed 24% more capital in the last five years, and the returns on that capital have remained stable at 16%. 16% is a pretty standard return, and it provides some comfort knowing that CI Games has consistently earned this amount. 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.
What We Can Learn From CI Games' ROCE
In the end, CI Games has proven its ability to adequately reinvest capital at good rates of return. Yet over the last five years the stock has declined 39%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
Like most companies, CI Games does come with some risks, and we've found 2 warning signs that you should be aware of.
While CI Games isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. 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.
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About WSE:CIG
CI Games
Produces, publishes, and distributes video games in Europe, North and South America, Asia, and Africa.
Excellent balance sheet with acceptable track record.
