Capital allocation trends at Technogym (BIT:TGYM) are less than ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should be looking for? Among other things, we will want to see two things; first, growth come back on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. However, after briefly looking at the numbers, we don’t think Technogym (BIT: TGYM) has the makings of a multi-bagger in the future, but let’s see why it might be.

Return on capital employed (ROCE): what is it?

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for Technogym, here is the formula:

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

0.17 = €69m ÷ (€717m – €308m) (Based on the last twelve months to June 2022).

Therefore, Technogym posted a ROCE of 17%. This is a fairly standard return and is in line with the industry average of 17%.

Our analysis indicates that TGYM is potentially overrated!

BIT:TGYM Return on Capital Employed October 22, 2022

In the chart above, we measured Technogym’s past ROCE against its past performance, but the future is arguably more important. If you want to see what analysts predict for the future, you should check out our free report for Technogym.

So what is Technogym’s ROCE trend?

In terms of Technogym’s historic ROCE moves, the trend isn’t fantastic. Over the past five years, capital returns have declined to 17% from 41% five years ago. Although, given that revenue and the amount of assets used in the business have increased, it could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. If these investments prove successful, it can bode very well for long-term stock performance.

On a related note, Technogym reduced its current liabilities to 43% of total assets. So we could tie some of that to the decline in ROCE. Additionally, it may reduce some aspects of risk to the business, as the business’s suppliers or short-term creditors now fund less of its operations. Some would argue that this reduces the company’s effectiveness in generating a return on investment, as it now funds more of the operations with its own money. Keep in mind that 43% is still quite high, so these risks are still somewhat prevalent.

What we can learn from Technogym’s ROCE

Even though capital returns have fallen in the short term, we think it’s promising that both revenue and capital employed have increased for Technogym. However, total shareholder returns over the past five years have been flat, which may indicate that these growth trends are not yet priced in by investors. So we think it would be worth taking a closer look at this stock as the trends look encouraging.

Technogym comes with some risks though, and we’ve spotted 1 warning sign for Technogym that might interest you.

Although Technogym isn’t currently generating the highest returns, we’ve compiled a list of companies that are currently generating over 25% return on equity. look at this free list here.

Valuation is complex, but we help make it simple.

Find out if Technogym is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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