Gati (NSE:GATI) Is Finding It Tricky To Allocate Its Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Gati (NSE:GATI), we've spotted some signs that it could be struggling, so let's investigate.

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 Gati is:

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

0.018 = ₹132m ÷ (₹11b - ₹4.1b) (Based on the trailing twelve months to September 2021).

Therefore, Gati has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 14%.

See our latest analysis for Gati

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gati's ROCE against it's prior returns. If you'd like to look at how Gati has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Gati Tell Us?

We aren't inspired by the trend, given ROCE has reduced by 81% over the last five years and Gati is applying -27% less capital in the business, even after the capital raising they conducted (prior to their latest reported figures).

In Conclusion...

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. However the stock has delivered a 73% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Gati (of which 1 can't be ignored!) that you should know about.

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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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.