If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Speaking of which, we noticed some great changes in Gamania Digital Entertainment's (GTSM:6180) returns on capital, so let's have a look.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Gamania Digital Entertainment is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = NT$1.5b ÷ (NT$9.6b - NT$3.9b) (Based on the trailing twelve months to September 2020).
So, Gamania Digital Entertainment has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 20%.
View our latest analysis for Gamania Digital Entertainment
In the above chart we have measured Gamania Digital Entertainment's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
Gamania Digital Entertainment has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 2,427% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
On a separate but related note, it's important to know that Gamania Digital Entertainment has a current liabilities to total assets ratio of 40%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
In Conclusion...
In summary, we're delighted to see that Gamania Digital Entertainment has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 99% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing, we've spotted 1 warning sign facing Gamania Digital Entertainment that you might find interesting.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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About TPEX:6180
Gamania Digital Entertainment
Operates as an integrated internet company in Taiwan, rest of Asia, and internationally.
Flawless balance sheet with solid track record.
