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Capital Allocation Trends At Great Elm Group (NASDAQ:GEG) Aren't Ideal

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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Great Elm Group (NASDAQ:GEG), it didn't seem to tick all of these boxes.

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. To calculate this metric for Great Elm Group, this is the formula:

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

0.0016 = US$282k ÷ (US$215m - US$35m) (Based on the trailing twelve months to March 2021).

So, Great Elm Group has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 12%.

See our latest analysis for Great Elm Group

roce
roce

Historical performance is a great place to start when researching a stock so above you can see the gauge for Great Elm Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Great Elm Group, check out these free graphs here.

What Does the ROCE Trend For Great Elm Group Tell Us?

We weren't thrilled with the trend because Great Elm Group's ROCE has reduced by 100% over the last five years, while the business employed 286% more capital. Usually this isn't ideal, but given Great Elm Group conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Great Elm Group probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Great Elm Group's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 64% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Great Elm Group (including 1 which is concerning) .

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.

This article by Simply Wall St is general in nature. 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.

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