Investors Shouldn't Overlook G5 Entertainment's (STO:G5EN) Impressive Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at G5 Entertainment's (STO:G5EN) look very promising so lets take a look.

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. To calculate this metric for G5 Entertainment, this is the formula:

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

0.41 = kr223m ÷ (kr677m - kr130m) (Based on the trailing twelve months to March 2022).

Therefore, G5 Entertainment has an ROCE of 41%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 11%.

Check out our latest analysis for G5 Entertainment

In the above chart we have measured G5 Entertainment'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 G5 Entertainment here for free.

The Trend Of ROCE

We like the trends that we're seeing from G5 Entertainment. Over the last five years, returns on capital employed have risen substantially to 41%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 202%. So we're very much inspired by what we're seeing at G5 Entertainment thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 19%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what G5 Entertainment has. Astute investors may have an opportunity here because the stock has declined 16% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to continue researching G5 Entertainment, you might be interested to know about the 3 warning signs that our analysis has discovered.

G5 Entertainment 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.

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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.