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

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Grenobloise d'Electronique et d'Automatismes Société Anonyme (EPA:GEA), we weren't too hopeful.

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. Analysts use this formula to calculate it for Grenobloise d'Electronique et d'Automatismes Société Anonyme:

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

0.019 = €1.1m ÷ (€92m - €34m) (Based on the trailing twelve months to March 2024).

Therefore, Grenobloise d'Electronique et d'Automatismes Société Anonyme has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 6.6%.

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

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

So How Is Grenobloise d'Electronique et d'Automatismes Société Anonyme's ROCE Trending?

We are a bit anxious about the trends of ROCE at Grenobloise d'Electronique et d'Automatismes Société Anonyme. The company used to generate 7.3% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 28% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a side note, Grenobloise d'Electronique et d'Automatismes Société Anonyme's current liabilities have increased over the last five years to 37% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.9%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Grenobloise d'Electronique et d'Automatismes Société Anonyme's ROCE

To see Grenobloise d'Electronique et d'Automatismes Société Anonyme reducing the capital employed in the business in tandem with diminishing returns, is concerning. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Grenobloise d'Electronique et d'Automatismes Société Anonyme, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

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.

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