If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of PlaySide Studios (ASX:PLY) looks great, so lets see what the trend can tell us.

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. The formula for this calculation on PlaySide Studios is:

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

0.21 = AU$11m ÷ (AU$69m - AU$14m) (Based on the trailing twelve months to June 2024).

So, PlaySide Studios has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 8.5%.

Check out our latest analysis for PlaySide Studios

Above you can see how the current ROCE for PlaySide Studios 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 analyst report for PlaySide Studios .

So How Is PlaySide Studios' ROCE Trending?

PlaySide Studios is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 21%. The amount of capital employed has increased too, by 2,728%. So we're very much inspired by what we're seeing at PlaySide Studios thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 21%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

All in all, it's terrific to see that PlaySide Studios is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 59% in the last three years. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know about the risks facing PlaySide Studios, we've discovered 1 warning sign that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.