- Oops!Something went wrong.Please try again later.
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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Take-Two Interactive Software's (NASDAQ:TTWO) 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. The formula for this calculation on Take-Two Interactive Software is:
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).
Thus, Take-Two Interactive Software has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Entertainment industry average of 10% it's much better.
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, you can check out the forecasts from the analysts covering Take-Two Interactive Software here for free.
What Can We Tell From Take-Two Interactive Software's ROCE Trend?
Investors would be pleased with what's happening at 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.
What We Can Learn From Take-Two Interactive Software's ROCE
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. In light of that, we think it's worth looking further into this stock because if Take-Two Interactive Software can keep these trends up, it could have a bright future ahead.
While Take-Two Interactive Software looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether TTWO is currently trading for a fair price.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.