The Returns At Gel (BIT:GEL) Provide Us With Signs Of What's To Come

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Gel (BIT:GEL), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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 Gel:

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

0.053 = €646k ÷ (€19m - €6.4m) (Based on the trailing twelve months to June 2020).

Therefore, Gel has an ROCE of 5.3%. Even though it's in line with the industry average of 5.3%, it's still a low return by itself.

Check out our latest analysis for Gel

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

What The Trend Of ROCE Can Tell Us

In terms of Gel's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 5.3% from 13% four years ago. However it looks like Gel might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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, Gel has done well to pay down its current liabilities to 34% of total assets. That could partly explain why the ROCE has dropped. 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.

The Key Takeaway

To conclude, we've found that Gel is reinvesting in the business, but returns have been falling. Since the stock has declined 59% over the last three years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Gel does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those are concerning...

While Gel 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. 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.
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