The Return Trends At Weibo (NASDAQ:WB) Look Promising

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Speaking of which, we noticed some great changes in Weibo's (NASDAQ:WB) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Weibo:

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

0.10 = US$557m ÷ (US$6.5b - US$1.1b) (Based on the trailing twelve months to March 2021).

Thus, Weibo has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Interactive Media and Services industry average of 8.1% it's much better.

See our latest analysis for Weibo

In the above chart we have measured Weibo'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 report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Weibo are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 10%. The amount of capital employed has increased too, by 737%. So we're very much inspired by what we're seeing at Weibo thanks to its ability to profitably reinvest capital.

In Conclusion...

To sum it up, Weibo has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 85% to shareholders over the last five years, it's fair to say investors are beginning to recognize 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.

Like most companies, Weibo does come with some risks, and we've found 2 warning signs that you should be aware of.

While Weibo 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. 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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