Geke SA. (ATH:PRESD): Assessing Capital Returns

I am writing today to help inform people who are new to the stock market and want a simplistic look at the return on Geke SA. (ATSE:PRESD) stock.

Buying Geke makes you a partial owner of the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. Your return is tied to PRESD’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Thus, to understand how your money can grow by investing in Geke, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).

View our latest analysis for Geke

ROCE: Explanation and Calculation

You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Geke is good at growing investor capital. I have calculated Geke’s ROCE for you below:

ROCE Calculation for PRESD

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = €3.47M ÷ (€66.38M – €3.01M) = 5.47%

As you can see, PRESD earned €5.5 from every €100 you invested over the previous twelve months. A good ROCE hurdle you should aim for in your investments is 15%, which PRESD has failed to reach, meaning the company creates an unimpressive amount of earnings from capital employed.

ATSE:PRESD Last Perf May 21st 18
ATSE:PRESD Last Perf May 21st 18

Then why have investors invested?

Although Geke is in an unfavourable position, you should know that this could change if the company is able to increase earnings on the same capital base or find new efficiencies that require less capital to produce earnings. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Looking three years in the past, it is evident that PRESD’s ROCE has risen from 1.68%, indicating the company’s capital returns have stengthened. Similarly, the movement in the earnings variable shows a jump from €1.09M to €3.47M whilst the amount of capital employed has decreased due to a fall in total assets , which is an indication that Geke has increased the ROCE for investors by producing more earnings and using less capital.

Next Steps

ROCE for PRESD investors is below the desired level at the moment, however, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like the management team and valuation to determine whether there is potential for return by focusing our attention elsewhere. Geke’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.

  1. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Geke’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  2. Valuation: What is PRESD worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether PRESD is currently undervalued by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.