Some Investors May Be Worried About NetEase's (NASDAQ:NTES) Returns On Capital

June 27, 2021
  •  Updated
November 29, 2022
NasdaqGS:NTES
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. However, after briefly looking over the numbers, we don't think NetEase (NASDAQ:NTES) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on NetEase is:

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

0.14 = CN¥14b ÷ (CN¥151b - CN¥51b) (Based on the trailing twelve months to March 2021).

Thus, NetEase has an ROCE of 14%. That's a pretty standard return and it's in line with the industry average of 14%.

See our latest analysis for NetEase

roce
NasdaqGS:NTES Return on Capital Employed June 28th 2021

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

What Does the ROCE Trend For NetEase Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 28% five years ago, while capital employed has grown 219%. That being said, NetEase raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. NetEase probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

The Bottom Line On NetEase's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for NetEase. And the stock has done incredibly well with a 207% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

While NetEase doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While NetEase may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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