If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Gumtree Australia Markets (ASX:GUM) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Gumtree Australia Markets:

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

0.0029 = AU$250k ÷ (AU$148m - AU$62m) (Based on the trailing twelve months to June 2024).

Thus, Gumtree Australia Markets has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Interactive Media and Services industry average of 9.3%.

See our latest analysis for Gumtree Australia Markets

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're interested in investigating Gumtree Australia Markets' past further, check out this free graph covering Gumtree Australia Markets' past earnings, revenue and cash flow.

What Can We Tell From Gumtree Australia Markets' ROCE Trend?

On the surface, the trend of ROCE at Gumtree Australia Markets doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.3% from 0.4% five years ago. 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 separate but related note, it's important to know that Gumtree Australia Markets has a current liabilities to total assets ratio of 42%, 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.

Our Take On Gumtree Australia Markets' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Gumtree Australia Markets. However, despite the promising trends, the stock has fallen 12% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Gumtree Australia Markets does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those are a bit unpleasant...

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.