Be Wary Of Gujarat Ambuja Exports (NSE:GAEL) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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 Gujarat Ambuja Exports (NSE:GAEL) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. To calculate this metric for Gujarat Ambuja Exports, this is the formula:

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

0.12 = ₹3.2b ÷ (₹31b - ₹4.8b) (Based on the trailing twelve months to September 2023).

Therefore, Gujarat Ambuja Exports has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 14% generated by the Food industry.

Check out our latest analysis for Gujarat Ambuja Exports

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gujarat Ambuja Exports' ROCE against it's prior returns. If you're interested in investigating Gujarat Ambuja Exports' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Gujarat Ambuja Exports' ROCE Trend?

When we looked at the ROCE trend at Gujarat Ambuja Exports, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 12% from 27% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Gujarat Ambuja Exports has done well to pay down its current liabilities to 15% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Gujarat Ambuja Exports' ROCE

In summary, Gujarat Ambuja Exports is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 208% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to know some of the risks facing Gujarat Ambuja Exports we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Gujarat Ambuja Exports 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. 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.