Returns On Capital At Technogym (BIT:TGYM) Paint A Concerning Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Having said that, from a first glance at Technogym (BIT:TGYM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Technogym:

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

0.13 = €59m ÷ (€684m - €245m) (Based on the trailing twelve months to December 2020).

Thus, Technogym has an ROCE of 13%. In isolation, that's a pretty standard return but against the Leisure industry average of 18%, it's not as good.

View our latest analysis for Technogym

Above you can see how the current ROCE for Technogym 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 Technogym here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Technogym doesn't inspire confidence. Over the last five years, returns on capital have decreased to 13% from 54% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Technogym has done well to pay down its current liabilities to 36% 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.

What We Can Learn From Technogym's ROCE

We're a bit apprehensive about Technogym because despite more capital being deployed in the business, returns on that capital and sales have both fallen. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 204%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to continue researching Technogym, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Technogym 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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