How Has Gulf Medical Projects Company (PJSC) (ADX:GMPC) Allocated Its Capital?

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Gulf Medical Projects Company (PJSC) (ADX:GMPC), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Gulf Medical Projects Company (PJSC):

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

0.029 = د.إ33m ÷ (د.إ1.3b - د.إ166m) (Based on the trailing twelve months to December 2020).

Thus, Gulf Medical Projects Company (PJSC) has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 9.8%.

View our latest analysis for Gulf Medical Projects Company (PJSC)

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 Gulf Medical Projects Company (PJSC)'s past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The trend of returns that Gulf Medical Projects Company (PJSC) is generating are raising some concerns. To be more specific, today's ROCE was 6.0% five years ago but has since fallen to 2.9%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 33% over that same period. 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.

The Bottom Line

To see Gulf Medical Projects Company (PJSC) reducing the capital employed in the business in tandem with diminishing returns, is concerning. Since the stock has skyrocketed 109% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to know some of the risks facing Gulf Medical Projects Company (PJSC) we've found 4 warning signs (1 is potentially serious!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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