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Some Investors May Be Worried About Gambling.com Group's (NASDAQ:GAMB) Returns On Capital
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 Gambling.com 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 Gambling.com 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, Gambling.com 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 Gambling.com Group
In the above chart we have measured Gambling.com 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 Gambling.com Group here for free.
How Are Returns Trending?
In terms of Gambling.com 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, Gambling.com 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 Gambling.com 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 Gambling.com Group that we think you should be aware of.
While Gambling.com 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 Gambling.com Group?
Gambling.com Group Limited operates as a performance marketing company for the online gambling industry worldwide.
Rewards
Trading at 51% below our estimate of its fair value
Earnings are forecast to grow 74.12% per year
Risks
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
Further research on
Gambling.com Group
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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.
About NasdaqGM:GAMB
Gambling.com Group
Gambling.com Group Limited operates as a performance marketing company for the online gambling industry worldwide.
Flawless balance sheet with reasonable growth potential.
