If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Grenobloise d'Electronique et d'Automatismes Société Anonyme (EPA:GEA), the trends above didn't look too great.
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. 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)
0.038 = €3.1m ÷ (€99m - €18m) (Based on the trailing twelve months to September 2020).
Thus, Grenobloise d'Electronique et d'Automatismes Société Anonyme has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 4.9%.
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, revenue and cash flow of Grenobloise d'Electronique et d'Automatismes Société Anonyme, check out these free graphs here.
The Trend Of ROCE
We are a bit worried about the trend of returns on capital at Grenobloise d'Electronique et d'Automatismes Société Anonyme. To be more specific, the ROCE was 16% five years ago, but since then it has dropped noticeably. 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 Grenobloise d'Electronique et d'Automatismes Société Anonyme becoming one if things continue as they have.
Our Take On Grenobloise d'Electronique et d'Automatismes Société Anonyme's ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Yet despite these concerning fundamentals, the stock has performed strongly with a 53% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
One more thing: We've identified 2 warning signs with Grenobloise d'Electronique et d'Automatismes Société Anonyme (at least 1 which is concerning) , and understanding them would certainly be useful.
While Grenobloise d'Electronique et d'Automatismes Société Anonyme isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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