Returns On Capital Are Showing Encouraging Signs At Take-Two Interactive Software (NASDAQ:TTWO)

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So on that note, Take-Two Interactive Software (NASDAQ:TTWO) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Take-Two Interactive Software, this is the formula:

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

0.18 = US$671m ÷ (US$6.0b - US$2.2b) (Based on the trailing twelve months to March 2021).

Therefore, Take-Two Interactive Software has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 12% generated by the Entertainment industry.

See our latest analysis for Take-Two Interactive Software

In the above chart we have measured Take-Two Interactive Software'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 Take-Two Interactive Software.

What Does the ROCE Trend For Take-Two Interactive Software Tell Us?

We like the trends that we're seeing from Take-Two Interactive Software. Over the last five years, returns on capital employed have risen substantially to 18%. The amount of capital employed has increased too, by 177%. So we're very much inspired by what we're seeing at Take-Two Interactive Software thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 37%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

In summary, it's great to see that Take-Two Interactive Software can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 1 warning sign facing Take-Two Interactive Software that you might find interesting.

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. 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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