Should You Be Impressed By GMéxico Transportes. de's (BMV:GMXT) Returns on Capital?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at GMéxico Transportes. de (BMV:GMXT) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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 GMéxico Transportes. de, this is the formula:

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

0.13 = Mex$14b ÷ (Mex$120b - Mex$10b) (Based on the trailing twelve months to September 2020).

Thus, GMéxico Transportes. de has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Transportation industry average of 7.5% it's much better.

Check out our latest analysis for GMéxico Transportes. de

In the above chart we have measured GMéxico Transportes. de'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 GMéxico Transportes. de here for free.

So How Is GMéxico Transportes. de's ROCE Trending?

In terms of GMéxico Transportes. de's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 18%, but since then they've fallen to 13%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From GMéxico Transportes. de's ROCE

To conclude, we've found that GMéxico Transportes. de is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last three years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to continue researching GMéxico Transportes. de, you might be interested to know about the 2 warning signs that our analysis has discovered.

While GMéxico Transportes. 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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