General de Alquiler de Maquinaria (BME:GAM) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 General de Alquiler de Maquinaria (BME:GAM), it didn't seem to tick all of these boxes.

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 General de Alquiler de Maquinaria is:

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

0.027 = €9.9m ÷ (€505m - €145m) (Based on the trailing twelve months to June 2023).

So, General de Alquiler de Maquinaria has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 14%.

Check out our latest analysis for General de Alquiler de Maquinaria

In the above chart we have measured General de Alquiler de Maquinaria's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For General de Alquiler de Maquinaria Tell Us?

On the surface, the trend of ROCE at General de Alquiler de Maquinaria doesn't inspire confidence. Around five years ago the returns on capital were 6.1%, but since then they've fallen to 2.7%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On General de Alquiler de Maquinaria's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that General de Alquiler de Maquinaria is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 23% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you want to continue researching General de Alquiler de Maquinaria, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.