GCL Global Holdings (NASDAQ:GCL) Is Finding It Tricky To Allocate Its Capital

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into GCL Global Holdings (NASDAQ:GCL), we weren't too upbeat about how things were going.

Understanding 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. The formula for this calculation on GCL Global Holdings is:

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

0.029 = US$606k ÷ (US$46m - US$25m) (Based on the trailing twelve months to September 2023).

Therefore, GCL Global Holdings has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 8.5%.

See our latest analysis for GCL Global Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for GCL Global Holdings' ROCE against it's prior returns. If you're interested in investigating GCL Global Holdings' past further, check out this free graph covering GCL Global Holdings' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about GCL Global Holdings, given the returns are trending downwards. About one year ago, returns on capital were 21%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last one year. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on GCL Global Holdings becoming one if things continue as they have.

On a separate but related note, it's important to know that GCL Global Holdings has a current liabilities to total assets ratio of 55%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 43% from where it was year ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with GCL Global Holdings (including 2 which are a bit unpleasant) .

While GCL Global Holdings 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.