The Returns On Capital At Gambero Rosso (BIT:GAMB) Don't Inspire Confidence

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Gambero Rosso (BIT:GAMB), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Gambero Rosso is:

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

0.04 = €751k ÷ (€32m - €14m) (Based on the trailing twelve months to December 2021).

So, Gambero Rosso has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Media industry average of 6.8%.

See 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're interested in investigating Gambero Rosso's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Gambero Rosso Tell Us?

On the surface, the trend of ROCE at Gambero Rosso doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.0% from 11% five years ago. However it looks like Gambero Rosso 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, Gambero Rosso has done well to pay down its current liabilities to 42% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 42% is still pretty high, so those risks are still somewhat prevalent.

The Key Takeaway

To conclude, we've found that Gambero Rosso is reinvesting in the business, but returns have been falling. Since the stock has declined 69% over the last five years, investors may not be too optimistic on this trend improving either. 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.

One more thing: We've identified 4 warning signs with Gambero Rosso (at least 3 which make us uncomfortable) , and understanding them would certainly be useful.

While Gambero Rosso 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. 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.