Returns On Capital Are Showing Encouraging Signs At Lionsgate Studios (NASDAQ:LION)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Lionsgate Studios (NASDAQ:LION) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Lionsgate Studios is:

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

0.087 = US$211m ÷ (US$5.1b - US$2.7b) (Based on the trailing twelve months to December 2023).

Thus, Lionsgate Studios has an ROCE of 8.7%. On its own, that's a low figure but it's around the 11% average generated by the Entertainment industry.

View our latest analysis for Lionsgate Studios

In the above chart we have measured Lionsgate Studios' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Lionsgate Studios .

How Are Returns Trending?

Lionsgate Studios is showing promise given that its ROCE is trending up and to the right. The figures show that over the last two years, ROCE has grown 60% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 53% of the business, which is more than it was two years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Lionsgate Studios' ROCE

To sum it up, Lionsgate Studios is collecting higher returns from the same amount of capital, and that's impressive. Given the stock has declined 19% in the last year, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Lionsgate Studios (of which 1 is significant!) that you should know about.

While Lionsgate Studios isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

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