Returns On Capital At NeoGames (NASDAQ:NGMS) Paint A Concerning Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at NeoGames (NASDAQ:NGMS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for NeoGames, this is the formula:

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

0.10 = US$8.6m ÷ (US$114m - US$32m) (Based on the trailing twelve months to September 2021).

Therefore, NeoGames has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Hospitality industry average of 9.0%.

View our latest analysis for NeoGames

In the above chart we have measured NeoGames' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering NeoGames here for free.

How Are Returns Trending?

When we looked at the ROCE trend at NeoGames, we didn't gain much confidence. Over the last two years, returns on capital have decreased to 10% from 27% two years ago. 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, NeoGames has decreased its current liabilities to 28% of total assets. So we could link some of this to the decrease in ROCE. 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 NeoGames' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that NeoGames is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 42% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know about the risks facing NeoGames, we've discovered 2 warning signs that you should be aware of.

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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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.