Yahoo Finance East Side Games Group (TSE:EAGR) Will Want To Turn Around Its Return Trends
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at East Side Games Group (TSE:EAGR), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for East Side Games Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.013 = CA$698k ÷ (CA$69m - CA$14m) (Based on the trailing twelve months to December 2023).
Thus, East Side Games Group has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 9.3%.
Check out our latest analysis for East Side Games Group
In the above chart we have measured East Side Games Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for East Side Games Group .
How Are Returns Trending?
When we looked at the ROCE trend at East Side Games Group, we didn't gain much confidence. Around five years ago the returns on capital were 28%, but since then they've fallen to 1.3%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
In Conclusion...
In summary, we're somewhat concerned by East Side Games Group's diminishing returns on increasing amounts of capital. We expect this has contributed to the stock plummeting 79% during the last three years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
East Side Games Group does have some risks, we noticed 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
