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

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Take-Two Interactive Software (NASDAQ:TTWO) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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$751m ÷ (US$6.3b - US$2.2b) (Based on the trailing twelve months to June 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 11% generated by the Entertainment industry.

See our latest analysis for Take-Two Interactive Software

Above you can see how the current ROCE for Take-Two Interactive Software 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 Take-Two Interactive Software.

So How Is Take-Two Interactive Software's ROCE Trending?

Investors would be pleased with what's happening at Take-Two Interactive Software. The data shows that returns on capital have increased substantially over the last five years to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 225% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 34%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

What We Can Learn From Take-Two Interactive Software's ROCE

All in all, it's terrific to see that Take-Two Interactive Software is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 280% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 1 warning sign for Take-Two Interactive Software that we think you should be aware of.

While Take-Two Interactive Software isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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