Is Grupo Gigante S. A. B. de C. V (BMV:GIGANTE) Headed For Trouble?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Grupo Gigante S. A. B. de C. V (BMV:GIGANTE), the trends above didn't look too great.

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. To calculate this metric for Grupo Gigante S. A. B. de C. V, this is the formula:

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

0.016 = Mex$603m ÷ (Mex$46b - Mex$8.2b) (Based on the trailing twelve months to September 2020).

Thus, Grupo Gigante S. A. B. de C. V has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 9.4%.

Check out our latest analysis for Grupo Gigante S. A. B. de C. V

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Grupo Gigante S. A. B. de C. V, check out these free graphs here.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Grupo Gigante S. A. B. de C. V. About five years ago, returns on capital were 7.3%, however they're now substantially lower than that as we saw above. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Grupo Gigante S. A. B. de C. V becoming one if things continue as they have.

The Bottom Line On Grupo Gigante S. A. B. de C. V's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 31% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Like most companies, Grupo Gigante S. A. B. de C. V does come with some risks, and we've found 2 warning signs that you should be aware of.

While Grupo Gigante S. A. B. de C. V 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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