The Returns On Capital At Gan Shmuel Foods (TLV:GSFI) Don't Inspire Confidence

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. 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 glancing at the trends within Gan Shmuel Foods (TLV:GSFI), we weren't too hopeful.

What Is Return On Capital Employed (ROCE)?

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 Gan Shmuel Foods is:

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

0.004 = US$660k ÷ (US$224m - US$60m) (Based on the trailing twelve months to September 2022).

So, Gan Shmuel Foods has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Food industry average of 16%.

Our analysis indicates that GSFI is potentially undervalued!

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 Gan Shmuel Foods' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Gan Shmuel Foods' ROCE Trend?

In terms of Gan Shmuel Foods' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 13% five years ago, but since then it has dropped noticeably. 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 Gan Shmuel Foods becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Gan Shmuel Foods is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 55% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Gan Shmuel Foods does have some risks, we noticed 3 warning signs (and 2 which are a bit concerning) we think you should know about.

While Gan Shmuel Foods 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.