Technogym’s returns on capital (BIT: TGYM) do not reflect the activity

Did you know that certain financial measures can provide clues about a potential multi-bagger? Generally, we will want to notice a growing trend to recover on capital employed (ROCE) and at the same time, a based capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a dialing machine. Although, when we considered Technogym (BIT: TGYM), he didn’t seem to tick all of those boxes.

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

For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. To calculate this metric for Technogym, here is the formula:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.18 = 68 M € ÷ (686 M € – 306 M €) (Based on the last twelve months up to June 2021).

Thereby, Technogym has a ROCE of 18%. By itself, this is a normal return on capital and is in line with industry average returns of 18%.

Check out our latest review for Technogym

BIT: TGYM Return on the capital employed September 20, 2021

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

What can we say about Technogym’s ROCE trend?

When we looked at the ROCE trend at Technogym, we didn’t gain much trust. To be more precise, ROCE has increased by 40% over the past five years. Meanwhile, the company is using more capital, but it hasn’t changed much in terms of sales over the past 12 months, so it might reflect longer-term investments. It’s worth keeping an eye on the company’s profits from now on to see if those investments end up contributing to the bottom line.

On a related note, Technogym reduced its current liabilities to 45% of total assets. So we could link some of that to the decrease in ROCE. In addition, it can reduce some aspects of the risk to the business, as the company’s suppliers or short-term creditors are now less funding its operations. Since the company essentially finances a larger portion of its operations with its own money, you could argue that this has made the company less efficient at generating ROCE. Either way, they’re still at a fairly high level, so we would like to see them drop further if possible.

Our opinion on Technogym’s ROCE

In summary, Technogym is reinvesting funds in the business for growth, but unfortunately it appears that sales haven’t grown much yet. Yet to long-term shareholders, the stock has offered them an incredible 135% return over the past five years, so the market seems bullish on its future. But if the trajectory of those underlying trends continues, we think the likelihood of it being a multi-bagging from here is not high.

One more thing to note, we have identified 1 warning sign with Technogym and understanding this should be part of your investment process.

If you want to look for solid businesses with great income, check out this free list of companies with good balance sheets and impressive returns on equity.

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