Editor’s Note
This analysis uses Return on Capital Employed (ROCE) to evaluate the efficiency of Gem Diamonds. The calculation shows a ROCE of 4.7%, derived from a $15 million EBIT divided by the capital employed of $324 million. While this provides a snapshot, investors should consider this metric alongside other financial and operational factors for a complete assessment.
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Gem Diamonds:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.047 = US$15m ÷ (US$349m – US$25m)
(Based on the trailing twelve months to December 2024).
Thus, Gem Diamonds has an ROCE of 4.7%. In absolute terms, that’s a low return and it also under-performs the Metals and Mining industry average of 11%.
In terms of Gem Diamonds’ historical ROCE movements, the trend doesn’t inspire confidence. Unfortunately the returns on capital have diminished from the 6.7% that they were earning five years ago. On top of that, it’s worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren’t as high due potentially to new competition or smaller margins. So because these trends aren’t typically conducive to creating a multi-bagger, we wouldn’t hold our breath on Gem Diamonds becoming one if things continue as they have.
In summary, it’s unfortunate that Gem Diamonds is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 75% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we’d consider looking elsewhere.
Gem Diamonds does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable…