Electronic Arts (NASDAQ:EA) Has More To Do To Multiply In Value Going Forward

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Electronic Arts' (NASDAQ:EA) trend of ROCE, we liked what we saw.

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. Analysts use this formula to calculate it for Electronic Arts:

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

0.15 = US$1.6b ÷ (US$13b - US$2.8b) (Based on the trailing twelve months to June 2023).

So, Electronic Arts has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 11% generated by the Entertainment industry.

Check out our latest analysis for Electronic Arts

Above you can see how the current ROCE for Electronic Arts compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Electronic Arts.

So How Is Electronic Arts' ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 52% in that time. 15% is a pretty standard return, and it provides some comfort knowing that Electronic Arts 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.

Our Take On Electronic Arts' ROCE

The main thing to remember is that Electronic Arts has proven its ability to continually reinvest at respectable rates of return. And given the stock has only risen 7.7% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Electronic Arts is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Electronic Arts could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.