Returns On Capital Signal Difficult Times Ahead For GFL (NSE:GFLLIMITED)

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at GFL (NSE:GFLLIMITED), so let's see why.

Return On Capital Employed (ROCE): What is it?

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 GFL, this is the formula:

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

0.027 = ₹1.2b ÷ (₹59b - ₹17b) (Based on the trailing twelve months to December 2020).

Therefore, GFL has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 15%.

View our latest analysis for GFL

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 want to delve into the historical earnings, revenue and cash flow of GFL, check out these free graphs here.

So How Is GFL's ROCE Trending?

The trend of returns that GFL is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 2.7% we see today. On top of that, the business is utilizing 37% 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.

The Bottom Line

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about GFL, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.

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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