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What trends should we look for it we want to identify stocks that can 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in World Wrestling Entertainment's (NYSE:WWE) returns on capital, so let's have a look.
What is 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. To calculate this metric for World Wrestling Entertainment, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.35 = US$279m ÷ (US$1.4b - US$557m) (Based on the trailing twelve months to September 2020).
So, World Wrestling Entertainment has an ROCE of 35%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 15%.
In the above chart we have measured World Wrestling Entertainment'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 Can We Tell From World Wrestling Entertainment's ROCE Trend?
Investors would be pleased with what's happening at World Wrestling Entertainment. The data shows that returns on capital have increased substantially over the last five years to 35%. The amount of capital employed has increased too, by 177%. 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.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 41% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.
All in all, it's terrific to see that World Wrestling Entertainment is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 163% 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.
One more thing to note, we've identified 2 warning signs with World Wrestling Entertainment and understanding them should be part of your investment process.
World Wrestling Entertainment is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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