Returns On Capital At GEA Group (ETR:G1A) Have Stalled

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at GEA Group (ETR:G1A), it didn't seem to tick all of these boxes.

What is 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. The formula for this calculation on GEA Group is:

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

0.078 = €283m ÷ (€5.7b - €2.0b) (Based on the trailing twelve months to March 2021).

Thus, GEA Group has an ROCE of 7.8%. On its own, that's a low figure but it's around the 7.4% average generated by the Machinery industry.

Check out our latest analysis for GEA Group

Above you can see how the current ROCE for GEA Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for GEA Group.

What Does the ROCE Trend For GEA Group Tell Us?

Things have been pretty stable at GEA Group, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at GEA Group in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. With fewer investment opportunities, it makes sense that GEA Group has been paying out a decent 49% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

What We Can Learn From GEA Group's ROCE

In a nutshell, GEA Group has been trudging along with the same returns from the same amount of capital over the last five years. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think GEA Group has the makings of a multi-bagger.

On a separate note, we've found 1 warning sign for GEA Group you'll probably want to know about.

While GEA Group 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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