If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Nine Entertainment Holdings (ASX:NEC), it didn't seem to tick all of these boxes.

Understanding 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. The formula for this calculation on Nine Entertainment Holdings is:

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

0.11 = AU$337m ÷ (AU$4.0b - AU$882m) (Based on the trailing twelve months to June 2024).

Thus, Nine Entertainment Holdings has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Media industry.

See our latest analysis for Nine Entertainment Holdings

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'd like, you can check out the forecasts from the analysts covering Nine Entertainment Holdings for free.

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for Nine Entertainment Holdings' returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Nine Entertainment Holdings doesn't end up being a multi-bagger in a few years time. That probably explains why Nine Entertainment Holdings has been paying out 74% of its earnings as dividends to shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.

In Conclusion...

We can conclude that in regards to Nine Entertainment Holdings' returns on capital employed and the trends, there isn't much change to report on. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Nine Entertainment Holdings has the makings of a multi-bagger.

Like most companies, Nine Entertainment Holdings does come with some risks, and we've found 3 warning signs that you should be aware of.

While Nine Entertainment Holdings 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.

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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.