Is GMéxico Transportes. de (BMV:GMXT) Likely To Turn Things Around?

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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think GMéxico Transportes. de (BMV:GMXT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for GMéxico Transportes. de:

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

0.13 = Mex$13b ÷ (Mex$113b - Mex$9.7b) (Based on the trailing twelve months to December 2020).

Therefore, GMéxico Transportes. de has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Transportation industry average of 7.1% it's much better.

See our latest analysis for GMéxico Transportes. de

Above you can see how the current ROCE for GMéxico Transportes. 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.

What Does the ROCE Trend For GMéxico Transportes. de Tell Us?

When we looked at the ROCE trend at GMéxico Transportes. de, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 20% 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 GMéxico Transportes. de's ROCE

Bringing it all together, while we're somewhat encouraged by GMéxico Transportes. de's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 1.5% in the last three years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing to note, we've identified 2 warning signs with GMéxico Transportes. de and understanding them should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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