Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Looking at Splendid Medien (ETR:SPM), it does have a high ROCE right now, but lets see how returns are trending.

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. Analysts use this formula to calculate it for Splendid Medien:

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

0.24 = €3.4m ÷ (€31m - €17m) (Based on the trailing twelve months to June 2024).

Therefore, Splendid Medien has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 13%.

View our latest analysis for Splendid Medien

Historical performance is a great place to start when researching a stock so above you can see the gauge for Splendid Medien's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Splendid Medien.

What Does the ROCE Trend For Splendid Medien Tell Us?

In terms of Splendid Medien's historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 33% where it was five years ago. 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.

On a side note, Splendid Medien has done well to pay down its current liabilities to 55% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 55% is still pretty high, so those risks are still somewhat prevalent.