GSS Infotech (NSE:GSS) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at GSS Infotech (NSE:GSS) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for GSS Infotech, this is the formula:

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

0.016 = ₹37m ÷ (₹2.5b - ₹159m) (Based on the trailing twelve months to December 2023).

Therefore, GSS Infotech has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the IT industry average of 20%.

Check out our latest analysis for GSS Infotech

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

What The Trend Of ROCE Can Tell Us

In terms of GSS Infotech's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.6% from 12% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

On a related note, GSS Infotech has decreased its current liabilities to 6.5% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for GSS Infotech have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 7.7% return to shareholders who held over 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.

Like most companies, GSS Infotech does come with some risks, and we've found 3 warning signs that you should be aware of.

While GSS Infotech 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.