Should We Be Excited About The Trends Of Returns At Gallantt Metal (NSE:GALLANTT)?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Gallantt Metal (NSE:GALLANTT), it didn't seem to tick all of these boxes.

Understanding 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. To calculate this metric for Gallantt Metal, this is the formula:

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

0.036 = ₹261m ÷ (₹8.0b - ₹745m) (Based on the trailing twelve months to September 2020).

Thus, Gallantt Metal has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 9.3%.

Check out our latest analysis for Gallantt Metal

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 Gallantt Metal's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Gallantt Metal, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.6% from 16% 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, Gallantt Metal has done well to pay down its current liabilities to 9.3% of total assets. So we could link some of this to the decrease in ROCE. 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 Gallantt Metal's ROCE

In summary, we're somewhat concerned by Gallantt Metal's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 30% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Gallantt Metal does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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