Be Wary Of Gammon Infrastructure Projects (NSE:GAMMNINFRA) And Its Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Gammon Infrastructure Projects (NSE:GAMMNINFRA) we aren't filled with optimism, but let's investigate further.

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 Gammon Infrastructure Projects is:

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

0.018 = ₹206m ÷ (₹38b - ₹27b) (Based on the trailing twelve months to December 2020).

Therefore, Gammon Infrastructure Projects has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Construction industry average of 9.1%.

Check out our latest analysis for Gammon Infrastructure Projects

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 Gammon Infrastructure Projects' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Gammon Infrastructure Projects' ROCE Trending?

The trend of returns that Gammon Infrastructure Projects is generating are raising some concerns. To be more specific, today's ROCE was 2.4% five years ago but has since fallen to 1.8%. On top of that, the business is utilizing 87% 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 70%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On Gammon Infrastructure Projects' ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Unsurprisingly then, the stock has dived 85% over the last five years, so investors are recognizing these changes and don't like the company's prospects. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Gammon Infrastructure Projects (including 1 which can't be ignored) .

While Gammon Infrastructure Projects 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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