What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s 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. Having said that, from a first glance at Ubisoft Entertainment (EPA:UBI) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.

What is Return On Capital Employed (ROCE)?

Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Ubisoft Entertainment:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.092 = €352m ÷ (€4.8b – €948m) (Based on the trailing twelve months to September 2021).

Thus, Ubisoft Entertainment has an ROCE of 9.2%. In absolute terms, that’s a low return but it’s around the Entertainment industry average of 8.1%.

View our latest analysis for Ubisoft Entertainment

Above you can see how the current ROCE for Ubisoft Entertainment compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Ubisoft Entertainment.

The Trend Of ROCE

There are better returns on capital out there than what we’re seeing at Ubisoft Entertainment. The company has consistently earned 9.2% for the last five years, and the capital employed within the business has risen 114% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don’t provide a high return on capital.

The Key Takeaway

In conclusion, Ubisoft Entertainment has been investing more capital into the business, but returns on that capital haven’t increased. Although the market must be expecting these trends to improve because the stock has gained 55% over the last five years. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.

One more thing, we’ve spotted 2 warning signs facing Ubisoft Entertainment that you might find interesting.

While Ubisoft Entertainment may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.

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