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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Warner Bros. Discovery (NASDAQ:WBD) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for Warner Bros. Discovery, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0071 = US$634m ÷ (US$105b - US$16b) (Based on the trailing twelve months to December 2024).
So, Warner Bros. Discovery has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 9.7%.
View our latest analysis for Warner Bros. Discovery
Above you can see how the current ROCE for Warner Bros. Discovery compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Warner Bros. Discovery .
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Warner Bros. Discovery, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 0.7%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by Warner Bros. Discovery's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 48% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.