Here's What's Concerning About Graines Voltz's (EPA:GRVO) Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Graines Voltz (EPA:GRVO), we've spotted some signs that it could be struggling, so let's investigate.

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

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 Graines Voltz, this is the formula:

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

0.14 = €6.7m ÷ (€87m - €39m) (Based on the trailing twelve months to September 2020).

Therefore, Graines Voltz has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 17% generated by the Retail Distributors industry.

See our latest analysis for Graines Voltz

Historical performance is a great place to start when researching a stock so above you can see the gauge for Graines Voltz's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Graines Voltz, check out these free graphs here.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Graines Voltz. Unfortunately the returns on capital have diminished from the 21% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Graines Voltz becoming one if things continue as they have.

Another thing to note, Graines Voltz has a high ratio of current liabilities to total assets of 45%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In summary, it's unfortunate that Graines Voltz is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 610% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Graines Voltz does have some risks, we noticed 4 warning signs (and 2 which are significant) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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.
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