What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at African Media Entertainment (JSE:AME) and its ROCE trend, we weren't exactly thrilled.
What Is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for African Media Entertainment:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = R57m ÷ (R446m - R94m) (Based on the trailing twelve months to March 2024).
Therefore, African Media Entertainment has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 9.3% generated by the Media industry.
Check out our latest analysis for African Media Entertainment
Historical performance is a great place to start when researching a stock so above you can see the gauge for African Media Entertainment's ROCE against it's prior returns. If you'd like to look at how African Media Entertainment has performed in the past in other metrics, you can view this free graph of African Media Entertainment's past earnings, revenue and cash flow.
What Does the ROCE Trend For African Media Entertainment Tell Us?
On the surface, the trend of ROCE at African Media Entertainment doesn't inspire confidence. Around five years ago the returns on capital were 28%, but since then they've fallen to 16%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
In Conclusion...
In summary, African Media Entertainment is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 88% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.