Returns At Gestamp Automoción (BME:GEST) Appear To Be Weighed Down

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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.

Understanding Return On Capital Employed (ROCE)

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 Gestamp Automoción, this is the formula:

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

0.099 = €631m ÷ (€10b - €3.9b) (Based on the trailing twelve months to March 2024).

Thus, Gestamp Automoción has an ROCE of 9.9%. In absolute terms, that's a low return but it's around the Auto Components industry average of 8.9%.

View 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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Gestamp Automoción .

What Does the ROCE Trend For Gestamp Automoción Tell Us?

Over the past five years, Gestamp Automoción's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Gestamp Automoción in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

The Bottom Line On Gestamp Automoción's ROCE

In summary, Gestamp Automoción isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 36% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to know some of the risks facing Gestamp Automoción we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While Gestamp Automoción isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.