What These Trends Mean At Gulf Medical Projects Company (PJSC) (ADX:GMPC)

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Gulf Medical Projects Company (PJSC) (ADX:GMPC) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Gulf Medical Projects Company (PJSC), this is the formula:

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

0.027 = د.إ30m ÷ (د.إ1.3b - د.إ152m) (Based on the trailing twelve months to September 2020).

Thus, Gulf Medical Projects Company (PJSC) has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 9.5%.

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

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

In terms of Gulf Medical Projects Company (PJSC)'s historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 2.7% we see today. In addition to that, Gulf Medical Projects Company (PJSC) is now employing 34% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. 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 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 148%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 3 warning signs with Gulf Medical Projects Company (PJSC) (at least 1 which is potentially serious) , and understanding these would certainly be useful.

While Gulf Medical Projects Company (PJSC) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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