Yahoo Finance Some Investors May Be Worried About NeoGames' (NASDAQ:NGMS) Returns On Capital
What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at NeoGames (NASDAQ:NGMS) and its ROCE trend, we weren't exactly thrilled.
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 NeoGames is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$8.6m ÷ (US$114m - US$32m) (Based on the trailing twelve months to September 2021).
So, NeoGames has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Hospitality industry average of 9.0%.
See our latest analysis for NeoGames
Above you can see how the current ROCE for NeoGames compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is NeoGames' ROCE Trending?
In terms of NeoGames' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 27% over the last two years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a related note, NeoGames has decreased its current liabilities to 28% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
What We Can Learn From NeoGames' ROCE
While returns have fallen for NeoGames in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 15% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
One more thing, we've spotted 2 warning signs facing NeoGames that you might find interesting.
While NeoGames may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
