Gujarat Mineral Development (NSE:GMDCLTD) Will Be Hoping To Turn Its Returns On Capital Around

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Gujarat Mineral Development (NSE:GMDCLTD), the trends above didn't look too great.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Gujarat Mineral Development is:

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

0.041 = ₹2.0b ÷ (₹52b - ₹2.9b) (Based on the trailing twelve months to December 2021).

Therefore, Gujarat Mineral Development has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 9.9%.

View our latest analysis for Gujarat Mineral Development

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

What Can We Tell From Gujarat Mineral Development's ROCE Trend?

There is reason to be cautious about Gujarat Mineral Development, given the returns are trending downwards. About five years ago, returns on capital were 5.9%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Gujarat Mineral Development becoming one if things continue as they have.

The Bottom Line On Gujarat Mineral Development's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. However the stock has delivered a 69% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to know some of the risks facing Gujarat Mineral Development we've found 4 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Gujarat Mineral Development may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.