Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. So on that note, Future Gaming Group International (NGM:FGG) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Future Gaming Group International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.044 = kr6.5m ÷ (kr149m - kr1.7m) (Based on the trailing twelve months to September 2020).
Thus, Future Gaming Group International has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 16%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Future Gaming Group International, check out these free graphs here.
The Trend Of ROCE
The fact that Future Gaming Group International is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 4.4% on its capital. In addition to that, Future Gaming Group International is employing 430% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Key Takeaway
Long story short, we're delighted to see that Future Gaming Group International's reinvestment activities have paid off and the company is now profitable. Although the company may be facing some issues elsewhere since the stock has plunged 94% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.
One more thing: We've identified 4 warning signs with Future Gaming Group International (at least 2 which are significant) , and understanding these would certainly be useful.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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