We're Watching These Trends At Netmarble Joybomb (GTSM:6468)

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Netmarble Joybomb (GTSM:6468) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. The formula for this calculation on Netmarble Joybomb is:

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

0.037 = NT$20m ÷ (NT$745m - NT$196m) (Based on the trailing twelve months to June 2020).

Thus, Netmarble Joybomb has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 20%.

View our latest analysis for Netmarble Joybomb

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Netmarble Joybomb has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Netmarble Joybomb, we didn't gain much confidence. Around five years ago the returns on capital were 32%, but since then they've fallen to 3.7%. However it looks like Netmarble Joybomb might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Netmarble Joybomb's ROCE

Bringing it all together, while we're somewhat encouraged by Netmarble Joybomb's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 67% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to know some of the risks facing Netmarble Joybomb we've found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.

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