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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Grupo Industrial Saltillo. de (BMV:GISSAA), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Grupo Industrial Saltillo. de is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = US$29m ÷ (US$1.2b - US$274m) (Based on the trailing twelve months to March 2021).
Therefore, Grupo Industrial Saltillo. de has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 5.0%.
Above you can see how the current ROCE for Grupo Industrial Saltillo. de 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.
So How Is Grupo Industrial Saltillo. de's ROCE Trending?
On the surface, the trend of ROCE at Grupo Industrial Saltillo. de doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.0% from 8.4% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Grupo Industrial Saltillo. de's ROCE
Bringing it all together, while we're somewhat encouraged by Grupo Industrial Saltillo. de's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 10% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
Grupo Industrial Saltillo. de does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...
While Grupo Industrial Saltillo. de 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.
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