GL Events (EPA:GLO) Could Be Struggling To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating GL Events (EPA:GLO), we don't think it's current trends fit the mold of a multi-bagger.

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 GL Events is:

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

0.064 = €132m ÷ (€3.0b - €900m) (Based on the trailing twelve months to June 2022).

Thus, GL Events has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.7%.

Check out the opportunities and risks within the FR Commercial Services industry.

Above you can see how the current ROCE for GL Events compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering GL Events here for free.

The Trend Of ROCE

In terms of GL Events' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.4% from 9.5% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, GL Events has decreased its current liabilities to 30% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

The Bottom Line On GL Events' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for GL Events. And there could be an opportunity here if other metrics look good too, because the stock has declined 45% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

GL Events does have some risks though, and we've spotted 1 warning sign for GL Events that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.