If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Nine Entertainment Holdings (ASX:NEC) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Nine Entertainment Holdings:

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

0.11 = AU$348m ÷ (AU$4.0b - AU$849m) (Based on the trailing twelve months to December 2023).

Therefore, Nine Entertainment Holdings has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Media industry average of 8.6% it's much better.

See our latest analysis for Nine Entertainment Holdings  roce

In the above chart we have measured Nine Entertainment Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our freeanalyst report for Nine Entertainment Holdings .

What The Trend Of ROCE Can Tell Us

Nine Entertainment Holdings' ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 22% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.



The Bottom Line

To sum it up, Nine Entertainment Holdings is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has only returned 27% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Like most companies, Nine Entertainment Holdings does come with some risks, and we've found 4 warning signs that you should be aware of.

While Nine Entertainment Holdings isn't earning the highest return, check out this freelist of companies that are 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.