GKW (NSE:GKWLIMITED) Could Be Struggling To Allocate Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at GKW (NSE:GKWLIMITED) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for GKW:

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

0.0051 = ₹144m ÷ (₹28b - ₹125m) (Based on the trailing twelve months to December 2022).

Thus, GKW has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 14%.

See our latest analysis for GKW

Historical performance is a great place to start when researching a stock so above you can see the gauge for GKW's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of GKW, check out these free graphs here.

The Trend Of ROCE

On the surface, the trend of ROCE at GKW doesn't inspire confidence. Around five years ago the returns on capital were 3.0%, but since then they've fallen to 0.5%. 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.

The Bottom Line

In summary, we're somewhat concerned by GKW's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 7.1% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing, we've spotted 2 warning signs facing GKW that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.