Returns On Capital At Gestamp Automoción (BME:GEST) Have Hit The Brakes

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Gestamp Automoción (BME:GEST) and its ROCE trend, we weren't exactly thrilled.

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. 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)

0.11 = €671m ÷ (€10b - €3.8b) (Based on the trailing twelve months to June 2023).

Therefore, Gestamp Automoción has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.8% generated by the Auto Components industry.

See 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, you can check out the forecasts from the analysts covering Gestamp Automoción here for free.

What The Trend Of ROCE Can Tell Us

Over the past five years, Gestamp Automoción's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Gestamp Automoción to be a multi-bagger going forward.

The Bottom Line On Gestamp Automoción's ROCE

In a nutshell, Gestamp Automoción has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 23% 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.

One more thing, we've spotted 2 warning signs facing Gestamp Automoción that you might find interesting.

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.