Gattaca's (LON:GATC) Returns On Capital Tell Us There Is Reason To Feel Uneasy

When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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. And from a first read, things don't look too good at Gattaca (LON:GATC), so let's see why.

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Understanding Return On Capital Employed (ROCE)

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 Gattaca, this is the formula:

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

0.074 = UK£2.2m ÷ (UK£72m - UK£43m) (Based on the trailing twelve months to January 2025).

Therefore, Gattaca has an ROCE of 7.4%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 16%.

See our latest analysis for Gattaca

In the above chart we have measured Gattaca's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Gattaca for free.

How Are Returns Trending?

The trend of ROCE at Gattaca is showing some signs of weakness. To be more specific, today's ROCE was 16% five years ago but has since fallen to 7.4%. In addition to that, Gattaca is now employing 47% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, Gattaca's current liabilities have increased over the last five years to 60% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 7.4%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

What We Can Learn From Gattaca's ROCE

To see Gattaca reducing the capital employed in the business in tandem with diminishing returns, is concerning. However the stock has delivered a 98% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Gattaca does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are potentially serious...

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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.