There Are Reasons To Feel Uneasy About Gismondi 1754's (BIT:GIS) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Gismondi 1754 (BIT:GIS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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. The formula for this calculation on Gismondi 1754 is:

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

0.048 = €549k ÷ (€15m - €3.5m) (Based on the trailing twelve months to June 2021).

Thus, Gismondi 1754 has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Luxury industry average of 8.3%.

View our latest analysis for Gismondi 1754

In the above chart we have measured Gismondi 1754'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 report for Gismondi 1754.

How Are Returns Trending?

In terms of Gismondi 1754's historical ROCE movements, the trend isn't fantastic. Around two years ago the returns on capital were 17%, but since then they've fallen to 4.8%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Gismondi 1754 has decreased its current liabilities to 24% 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 Gismondi 1754's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Gismondi 1754 is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 15% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we've found 1 warning sign for Gismondi 1754 that we think you should be aware of.

While Gismondi 1754 isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.