If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at G N A Axles (NSE:GNA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. To calculate this metric for G N A Axles, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = ₹463m ÷ (₹8.2b - ₹2.7b) (Based on the trailing twelve months to June 2020).
So, G N A Axles has an ROCE of 8.4%. On its own, that's a low figure but it's around the 7.1% average generated by the Auto Components industry.
See 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're interested in investigating G N A Axles' past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For G N A Axles Tell Us?
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 8.4% from 23% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
On a side note, G N A Axles has done well to pay down its current liabilities to 33% of total assets. That could partly explain why the ROCE has dropped. 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.Our Take On G N A Axles' ROCE
In summary, we're somewhat concerned by G N A Axles' diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 21% from where it was three years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
One more thing to note, we've identified 3 warning signs with G N A Axles and understanding these should be part of your investment process.
While G N A Axles 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. 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.
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About NSEI:GNA
G N A Axles
Manufactures and sells auto components for the four-wheeler industry in North America, South America, Europe, Asia, and Australia.
Flawless balance sheet and fair value.
