Gambero Rosso's (BIT:GAMB) Returns Have Hit A Wall

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Gambero Rosso (BIT:GAMB) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Gambero Rosso, this is the formula:

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

0.13 = €2.4m ÷ (€32m - €14m) (Based on the trailing twelve months to June 2022).

Therefore, Gambero Rosso has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Media industry average of 8.5% it's much better.

View our latest analysis for Gambero Rosso

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

How Are Returns Trending?

Things have been pretty stable at Gambero Rosso, with its capital employed and returns on that capital staying somewhat the same for the last 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. With that in mind, unless investment picks up again in the future, we wouldn't expect Gambero Rosso to be a multi-bagger going forward.

On a separate but related note, it's important to know that Gambero Rosso has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Gambero Rosso's ROCE

We can conclude that in regards to Gambero Rosso's returns on capital employed and the trends, there isn't much change to report on. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 73% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a final note, we found 3 warning signs for Gambero Rosso (2 don't sit too well with us) you should be aware of.

While Gambero Rosso 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.