Gilat Telecom Global's (TLV:GLTL) Returns On Capital Not Reflecting Well On The Business

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Gilat Telecom Global (TLV:GLTL), we've spotted some signs that it could be struggling, so let's investigate.

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 Gilat Telecom Global is:

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

0.038 = US$757k ÷ (US$44m - US$24m) (Based on the trailing twelve months to June 2023).

Therefore, Gilat Telecom Global has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Telecom industry average of 12%.

See our latest analysis for Gilat Telecom Global

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gilat Telecom Global's ROCE against it's prior returns. If you're interested in investigating Gilat Telecom Global's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The trend of ROCE at Gilat Telecom Global is showing some signs of weakness. To be more specific, today's ROCE was 20% five years ago but has since fallen to 3.8%. On top of that, the business is utilizing 44% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a side note, Gilat Telecom Global's current liabilities have increased over the last five years to 55% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 3.8%. 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.

In Conclusion...

In summary, it's unfortunate that Gilat Telecom Global is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 69% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to continue researching Gilat Telecom Global, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Gilat Telecom Global 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.