Be Wary Of Guillemot (EPA:GUI) And Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Guillemot (EPA:GUI), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Guillemot is:

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

0.053 = €5.7m ÷ (€156m - €50m) (Based on the trailing twelve months to June 2023).

Therefore, Guillemot has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Tech industry average of 7.4%.

View our latest analysis for Guillemot

Above you can see how the current ROCE for Guillemot compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Guillemot's ROCE Trending?

When we looked at the ROCE trend at Guillemot, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.3% from 11% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Guillemot's ROCE

In summary, we're somewhat concerned by Guillemot's diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 89% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Guillemot does have some risks though, and we've spotted 1 warning sign for Guillemot that you might be interested in.

While Guillemot 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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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.