Stock Analysis

Gati (NSE:GATI) Has Some Difficulty Using Its Capital Effectively

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What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Gati (NSE:GATI), we weren't too hopeful.

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. The formula for this calculation on Gati is:

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

0.014 = ₹113m ÷ (₹13b - ₹4.6b) (Based on the trailing twelve months to December 2022).

Therefore, Gati has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Logistics industry average of 14%.

See our latest analysis for Gati

NSEI:GATI Return on Capital Employed March 16th 2023

In the above chart we have measured Gati's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Gati here for free.

What The Trend Of ROCE Can Tell Us

In terms of Gati's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 5.8% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Gati to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Gati is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 8.0% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing, we've spotted 2 warning signs facing Gati that you might find interesting.

While Gati 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.

Valuation is complex, but we're helping make it simple.

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