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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Lionsgate Studios (NASDAQ:LION) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Lionsgate Studios is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.087 = US$211m ÷ (US$5.1b - US$2.7b) (Based on the trailing twelve months to December 2023).
Thus, Lionsgate Studios has an ROCE of 8.7%. Even though it's in line with the industry average of 8.8%, it's still a low return by itself.
Check out our latest analysis for Lionsgate Studios
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Lionsgate Studios has performed in the past in other metrics, you can view this free graph of Lionsgate Studios' past earnings, revenue and cash flow.
What Does the ROCE Trend For Lionsgate Studios Tell Us?
Lionsgate Studios is showing promise given that its ROCE is trending up and to the right. The figures show that over the last two years, ROCE has grown 60% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 53% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.
Our Take On Lionsgate Studios' ROCE
To bring it all together, Lionsgate Studios has done well to increase the returns it's generating from its capital employed. Since the total return from the stock has been almost flat over the last year, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.