Here's What's Concerning About Grenobloise d'Electronique et d'Automatismes Société Anonyme's (EPA:GEA) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

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

So, Grenobloise d'Electronique et d'Automatismes Société Anonyme has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.1%.

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're interested in investigating Grenobloise d'Electronique et d'Automatismes Société Anonyme's past further, check out this free graph covering Grenobloise d'Electronique et d'Automatismes Société Anonyme's past earnings, revenue and cash flow.

What Can We Tell From Grenobloise d'Electronique et d'Automatismes Société Anonyme's ROCE Trend?

In terms of Grenobloise d'Electronique et d'Automatismes Société Anonyme's historical ROCE trend, it isn't fantastic. The company used to generate 7.3% on its capital five years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 28% over that same period. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 37%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line On Grenobloise d'Electronique et d'Automatismes Société Anonyme's ROCE

In summary, it's unfortunate that Grenobloise d'Electronique et d'Automatismes Société Anonyme is shrinking its capital base and also generating lower returns. Despite the concerning underlying trends, the stock has actually gained 0.8% over the last five years, so it might be that the investors are expecting the trends to reverse. 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 1 which can't be ignored) 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.