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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at PLAYSTUDIOS (NASDAQ:MYPS) and its ROCE trend, we weren't exactly thrilled.
Understanding 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. Analysts use this formula to calculate it for PLAYSTUDIOS:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0003 = US$92k ÷ (US$335m - US$30m) (Based on the trailing twelve months to December 2021).
So, PLAYSTUDIOS has an ROCE of 0.03%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 9.7%.
In the above chart we have measured PLAYSTUDIOS' 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.
So How Is PLAYSTUDIOS' ROCE Trending?
When we looked at the ROCE trend at PLAYSTUDIOS, we didn't gain much confidence. Over the last three years, returns on capital have decreased to 0.03% from 12% three years ago. However it looks like PLAYSTUDIOS might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a related note, PLAYSTUDIOS has decreased its current liabilities to 8.9% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
What We Can Learn From PLAYSTUDIOS' ROCE
Bringing it all together, while we're somewhat encouraged by PLAYSTUDIOS' reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 52% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
On a separate note, we've found 1 warning sign for PLAYSTUDIOS you'll probably want to know about.
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. 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.