Investors Could Be Concerned With Gestamp Automoción's (BME:GEST) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Gestamp Automoción (BME:GEST) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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 Gestamp Automoción:

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

0.067 = €396m ÷ (€8.9b - €3.0b) (Based on the trailing twelve months to March 2022).

Thus, Gestamp Automoción has an ROCE of 6.7%. Even though it's in line with the industry average of 6.7%, it's still a low return by itself.

Check out our latest analysis for Gestamp Automoción

Above you can see how the current ROCE for Gestamp Automoción compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Gestamp Automoción's ROCE Trend?

In terms of Gestamp Automoción's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Gestamp Automoción's ROCE

To conclude, we've found that Gestamp Automoción is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 41% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Gestamp Automoción has the makings of a multi-bagger.

If you want to know some of the risks facing Gestamp Automoción we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Gestamp Automoción 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.