Grenobloise d'Electronique et d'Automatismes Société Anonyme (EPA:GEA) Will Be Hoping To Turn Its Returns On Capital Around

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Grenobloise d'Electronique et d'Automatismes Société Anonyme (EPA:GEA) we aren't filled with optimism, but let's investigate further.

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 Grenobloise d'Electronique et d'Automatismes Société Anonyme, this is the formula:

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

0.037 = €2.7m ÷ (€89m - €16m) (Based on the trailing twelve months to March 2022).

Thus, Grenobloise d'Electronique et d'Automatismes Société Anonyme has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.5%.

View our latest analysis for Grenobloise d'Electronique et d'Automatismes Société Anonyme

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'd like to look at how Grenobloise d'Electronique et d'Automatismes Société Anonyme has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

There is reason to be cautious about Grenobloise d'Electronique et d'Automatismes Société Anonyme, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 10% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Grenobloise d'Electronique et d'Automatismes Société Anonyme becoming one if things continue as they have.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 16% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Grenobloise d'Electronique et d'Automatismes Société Anonyme does have some risks, we noticed 3 warning signs (and 2 which are concerning) we think you should know about.

While Grenobloise d'Electronique et d'Automatismes Société Anonyme 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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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.