Be Wary Of Great Eastern Energy (LON:GEEC) And Its Returns On Capital

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 Great Eastern Energy (LON:GEEC), the trends above didn't look too great.

What is 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. Analysts use this formula to calculate it for Great Eastern Energy:

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

0.078 = US$11m ÷ (US$160m - US$15m) (Based on the trailing twelve months to September 2020).

So, Great Eastern Energy has an ROCE of 7.8%. On its own that's a low return, but compared to the average of 4.0% generated by the Oil and Gas industry, it's much better.

Check out our latest analysis for Great Eastern Energy

Historical performance is a great place to start when researching a stock so above you can see the gauge for Great Eastern Energy's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Great Eastern Energy, check out these free graphs here.

How Are Returns Trending?

In terms of Great Eastern Energy's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 12%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Great Eastern Energy becoming one if things continue as they have.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 33% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Great Eastern Energy does have some risks, we noticed 5 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Great Eastern Energy 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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