Investors Could Be Concerned With Paradox Interactive's (STO:PDX) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, while the ROCE is currently high for Paradox Interactive (STO:PDX), we aren't jumping out of our chairs because returns are decreasing.

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. Analysts use this formula to calculate it for Paradox Interactive:

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

0.34 = kr887m ÷ (kr3.1b - kr551m) (Based on the trailing twelve months to December 2022).

Therefore, Paradox Interactive has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 10%.

View our latest analysis for Paradox Interactive

Above you can see how the current ROCE for Paradox Interactive 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 Paradox Interactive here for free.

How Are Returns Trending?

In terms of Paradox Interactive's historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 56%, 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Paradox Interactive's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Paradox Interactive is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 85% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Paradox Interactive does have some risks though, and we've spotted 1 warning sign for Paradox Interactive that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.