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If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within GCL Global Holdings (NASDAQ:GCL), we weren't too hopeful.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for GCL Global Holdings:
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
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how GCL Global Holdings has performed in the past in other metrics, you can view this free graph of GCL Global Holdings' past earnings, revenue and cash flow.
What Does the ROCE Trend For GCL Global Holdings Tell Us?
In terms of GCL Global Holdings' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 21% that they were earning one year ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect GCL Global Holdings to turn into a multi-bagger.
On a side note, GCL Global Holdings' current liabilities are still rather high at 55% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 43% from where it was year ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.