Returns On Capital Signal Tricky Times Ahead For Gestamp Automoción (BME:GEST)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Gestamp Automoción (BME:GEST), it didn't seem to tick all of these boxes.

Understanding 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. Analysts use this formula to calculate it for Gestamp Automoción:

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

0.072 = €411m ÷ (€8.3b - €2.6b) (Based on the trailing twelve months to September 2021).

Thus, Gestamp Automoción has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 9.6%.

Check out our latest analysis for Gestamp Automoción

In the above chart we have measured Gestamp Automoción's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Gestamp Automoción here for free.

The Trend Of ROCE

When we looked at the ROCE trend at Gestamp Automoción, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. However it looks like Gestamp Automoción might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Gestamp Automoción's ROCE

Bringing it all together, while we're somewhat encouraged by Gestamp Automoción's reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 22% 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 makes us a bit uncomfortable!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.