These Return Metrics Don't Make Gulf Medical Projects Company (PJSC) (ADX:GMPC) Look Too Strong

When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. 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)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.03 = د.إ33m ÷ (د.إ1.2b - د.إ167m) (Based on the trailing twelve months to March 2021).

So, Gulf Medical Projects Company (PJSC) has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 9.9%.

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

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gulf Medical Projects Company (PJSC)'s ROCE against it's prior returns. If you'd like to look at how Gulf Medical Projects Company (PJSC) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Gulf Medical Projects Company (PJSC)'s ROCE Trending?

The trend of returns that Gulf Medical Projects Company (PJSC) is generating are raising some concerns. The company used to generate 6.8% on its capital five years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 36% 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. If these underlying trends continue, we wouldn't be too optimistic going forward.

Our Take On Gulf Medical Projects Company (PJSC)'s ROCE

In summary, it's unfortunate that Gulf Medical Projects Company (PJSC) is shrinking its capital base and also generating lower returns. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 117%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 3 warning signs we've spotted with Gulf Medical Projects Company (PJSC) (including 1 which can't be ignored) .

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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