Is GSS Infotech (NSE:GSS) Struggling?

What underlying fundamental trends can indicate that a company might be in decline? 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 GSS Infotech (NSE:GSS), so let's see why.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on GSS Infotech is:

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

0.0071 = ₹9.7m ÷ (₹1.8b - ₹447m) (Based on the trailing twelve months to December 2020).

Therefore, GSS Infotech has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the IT industry average of 10%.

See our latest analysis for GSS Infotech

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 GSS Infotech, check out these free graphs here.

The Trend Of ROCE

We are a bit anxious about the trends of ROCE at GSS Infotech. To be more specific, today's ROCE was 1.8% five years ago but has since fallen to 0.7%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 25% over that same period. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line

To see GSS Infotech reducing the capital employed in the business in tandem with diminishing returns, is concerning. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 137%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know about the risks facing GSS Infotech, we've discovered 2 warning signs that you should be aware of.

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This article by Simply Wall St is general in nature. 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.
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