There Are Reasons To Feel Uneasy About Bumble's (NASDAQ:BMBL) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating Bumble (NASDAQ:BMBL), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. The formula for this calculation on Bumble is:

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

0.011 = US$39m ÷ (US$3.7b - US$187m) (Based on the trailing twelve months to June 2023).

Therefore, Bumble has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Interactive Media and Services industry average of 7.0%.

View our latest analysis for Bumble

In the above chart we have measured Bumble's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Bumble Tell Us?

In terms of Bumble's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 1.1% from 60% four 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Bumble has decreased its current liabilities to 5.1% of total assets. Considering it used to be 61%, that's a huge drop in that ratio and it would explain the decline in ROCE. 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.

What We Can Learn From Bumble's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Bumble. And there could be an opportunity here if other metrics look good too, because the stock has declined 37% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you're still interested in Bumble it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Bumble 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.