The Returns On Capital At G N A Axles (NSE:GNA) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at G N A Axles (NSE:GNA) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on G N A Axles is:

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

0.10 = ₹576m ÷ (₹8.2b - ₹2.6b) (Based on the trailing twelve months to December 2020).

Thus, G N A Axles has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 8.7% generated by the Auto Components industry.

Check out our latest analysis for G N A Axles

Historical performance is a great place to start when researching a stock so above you can see the gauge for G N A Axles' ROCE against it's prior returns. If you'd like to look at how G N A Axles has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is G N A Axles' ROCE Trending?

When we looked at the ROCE trend at G N A Axles, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 10% from 28% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, G N A Axles has decreased its current liabilities to 32% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From G N A Axles' ROCE

We're a bit apprehensive about G N A Axles because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 24% over the last three 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.

If you'd like to know about the risks facing G N A Axles, we've discovered 1 warning sign that you should be aware of.

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