GERRY WEBER International's (ETR:GWI2) Returns On Capital Tell Us There Is Reason To Feel Uneasy

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. On that note, looking into GERRY WEBER International (ETR:GWI2), we weren't too upbeat about how things were going.

Understanding 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 GERRY WEBER International is:

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

0.0022 = €461k ÷ (€309m - €96m) (Based on the trailing twelve months to September 2022).

Therefore, GERRY WEBER International has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Luxury industry average of 11%.

Check out our latest analysis for GERRY WEBER International

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

The Trend Of ROCE

The trend of ROCE at GERRY WEBER International is showing some signs of weakness. To be more specific, today's ROCE was 2.1% five years ago but has since fallen to 0.2%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 68% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, GERRY WEBER International's current liabilities have increased over the last five years to 31% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 0.2%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line

To see GERRY WEBER International reducing the capital employed in the business in tandem with diminishing returns, is concerning. Long term shareholders who've owned the stock over the last five years have experienced a 68% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 3 warning signs with GERRY WEBER International (at least 2 which don't sit too well with us) , and understanding them would certainly be useful.

While GERRY WEBER International 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.