Benzinga | Jul 9, 2021 11:16AM EDT

GameStop Insights: Return On Capital Employed

During Q1, GameStop (NYSE:GME) brought in sales totaling $1.28 billion. However, earnings decreased 317.02%, resulting in a loss of $40.80 million. In Q4, GameStop earned $18.80 million, and total sales reached $2.12 billion.

What Is Return On Capital Employed?

Return on Capital Employed is a measure of yearly pre-tax profit relative to capital employed by a business. Changes in earnings and sales indicate shifts in a company's ROCE. A higher ROCE is generally representative of successful growth of a company and is a sign of higher earnings per share in the future. A low or negative ROCE suggests the opposite. In Q1, GameStop posted an ROCE of -0.05%.

Keep in mind, while ROCE is a good measure of a company's recent performance, it is not a highly reliable predictor of a company's earnings or sales in the near future.

ROCE is an important metric for the comparison of similar companies. A relatively high ROCE shows GameStop is potentially operating at a higher level of efficiency than other companies in its industry. If the company is generating high profits with its current level of capital, some of that money can be reinvested in more capital which will generally lead to higher returns and earnings per share growth.

For GameStop, the return on capital employed ratio shows the current amount of assets may not actually be helping the company achieve higher returns, a note many investors will take into account when making long-term financial decisions.

Q1 Earnings Insight

GameStop reported Q1 earnings per share at $-0.45/share, which beat analyst predictions of $-0.83/share.