Here's What To Make Of Gascogne's (EPA:ALBI) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Gascogne (EPA:ALBI) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Gascogne is:

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

0.051 = €13m ÷ (€410m - €152m) (Based on the trailing twelve months to June 2020).

Therefore, Gascogne has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Packaging industry average of 12%.

View our latest analysis for Gascogne

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Gascogne's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Gascogne. The company has employed 59% more capital in the last five years, and the returns on that capital have remained stable at 5.1%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Gascogne has done well to reduce current liabilities to 37% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line

As we've seen above, Gascogne's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 44% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing: We've identified 2 warning signs with Gascogne (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

While Gascogne 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.

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