Capital Investments At NetEase (NASDAQ:NTES) Point To A Promising Future

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Ergo, when we looked at the ROCE trends at NetEase (NASDAQ:NTES), we liked what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for NetEase:

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

0.21 = CN¥29b ÷ (CN¥183b - CN¥46b) (Based on the trailing twelve months to June 2024).

Thus, NetEase has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 12%.

See our latest analysis for NetEase

In the above chart we have measured NetEase'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 analyst report for NetEase .

What The Trend Of ROCE Can Tell Us

It's hard not to be impressed by NetEase's returns on capital. Over the past five years, ROCE has remained relatively flat at around 21% and the business has deployed 133% more capital into its operations. Now considering ROCE is an attractive 21%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

On a side note, NetEase has done well to reduce current liabilities to 25% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

Our Take On NetEase's ROCE

In short, we'd argue NetEase has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has followed suit returning a meaningful 91% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you want to continue researching NetEase, you might be interested to know about the 2 warning signs that our analysis has discovered.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.