Returns On Capital Signal Difficult Times Ahead For Gati (NSE:GATI)

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Gati (NSE:GATI), the trends above didn't look too great.

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 Gati, this is the formula:

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

0.0055 = ₹41m ÷ (₹11b - ₹4.1b) (Based on the trailing twelve months to December 2021).

So, Gati has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 21%.

View our latest analysis for Gati

Above you can see how the current ROCE for Gati compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Gati's ROCE Trend?

We aren't too thrilled by the trend because ROCE has declined 93% over the last five years and despite the capital raising conducted before the latest reports, the business has -27% less capital employed.

The Bottom Line On Gati's ROCE

To see Gati reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors must expect better things on the horizon though because the stock has risen 28% in 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, Gati does come with some risks, and we've found 1 warning sign that you should be aware of.

While Gati isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.