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To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So when we looked at Activision Blizzard (NASDAQ:ATVI) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Activision Blizzard, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$3.0b ÷ (US$23b - US$3.2b) (Based on the trailing twelve months to March 2021).
So, Activision Blizzard has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Entertainment industry average of 14%.
In the above chart we have measured Activision Blizzard's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Activision Blizzard here for free.
What The Trend Of ROCE Can Tell Us
Investors would be pleased with what's happening at Activision Blizzard. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 15%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 35%. So we're very much inspired by what we're seeing at Activision Blizzard thanks to its ability to profitably reinvest capital.
The Bottom Line
All in all, it's terrific to see that Activision Blizzard is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Activision Blizzard can keep these trends up, it could have a bright future ahead.
On a final note, we've found 1 warning sign for Activision Blizzard that we think you should be aware of.
While Activision Blizzard 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. 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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