Is Gammon Infrastructure Projects (NSE:GAMMNINFRA) Headed For Trouble?

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Gammon Infrastructure Projects (NSE:GAMMNINFRA) we aren't filled with optimism, but let's investigate further.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Gammon Infrastructure Projects is:

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

0.011 = ₹127m ÷ (₹38b - ₹27b) (Based on the trailing twelve months to September 2020).

Therefore, Gammon Infrastructure Projects has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 8.9%.

See our latest analysis for Gammon Infrastructure Projects

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gammon Infrastructure Projects' ROCE against it's prior returns. If you're interested in investigating Gammon Infrastructure Projects' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Gammon Infrastructure Projects' ROCE Trend?

We are a bit anxious about the trends of ROCE at Gammon Infrastructure Projects. The company used to generate 2.6% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 87% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 70%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line On Gammon Infrastructure Projects' ROCE

In summary, it's unfortunate that Gammon Infrastructure Projects is shrinking its capital base and also generating lower returns. This could explain why the stock has sunk a total of 92% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing Gammon Infrastructure Projects we've found 4 warning signs (2 are a bit concerning!) that you should be aware of before investing here.

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.

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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.
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