GPI (BIT:GPI) Might Be Having Difficulty Using Its Capital Effectively

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at GPI (BIT:GPI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

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 GPI is:

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

0.068 = €14m ÷ (€359m - €150m) (Based on the trailing twelve months to June 2020).

Therefore, GPI has an ROCE of 6.8%. Ultimately, that's a low return and it under-performs the Healthcare Services industry average of 9.3%.

Check out our latest analysis for GPI

In the above chart we have measured GPI'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 GPI here for free.

What Can We Tell From GPI's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 10% five years ago, while capital employed has grown 360%. That being said, GPI raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence GPI might not have received a full period of earnings contribution from it.

On a side note, GPI's current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for GPI. However, total returns to shareholders over the last three years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to continue researching GPI, you might be interested to know about the 1 warning sign that our analysis has discovered.

While GPI 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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