Stock Analysis

Some Investors May Be Worried About Group's (NASDAQ:GAMB) Returns On Capital

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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. In light of that, when we looked at Group (NASDAQ:GAMB) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Group is:

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

0.11 = US$10m ÷ (US$133m - US$35m) (Based on the trailing twelve months to September 2022).

So, Group has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Media industry average of 9.4%.

Check out our latest analysis for Group

NasdaqGM:GAMB Return on Capital Employed March 18th 2023

In the above chart we have measured Group's 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 Group here for free.

How Are Returns Trending?

In terms of Group's historical ROCE movements, the trend isn't fantastic. Around three years ago the returns on capital were 14%, but since then they've fallen to 11%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Group's current liabilities have increased over the last three years to 26% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Key Takeaway

While returns have fallen for Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 5.2% over the last year. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

On a final note, we've found 2 warning signs for Group that we think you should be aware of.

While Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

What are the risks and opportunities for Group? Group Limited operates as a performance marketing company for the online gambling industry worldwide.

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  • Trading at 51% below our estimate of its fair value

  • Earnings are forecast to grow 74.12% per year


  • Shareholders have been diluted in the past year

  • Profit margins (3.1%) are lower than last year (29.4%)

  • Large one-off items impacting financial results

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