Gulf International Services Q.P.S.C (DSM:GISS) Is Finding It Tricky To Allocate Its Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. 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 glancing at the trends within Gulf International Services Q.P.S.C (DSM:GISS), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Gulf International Services Q.P.S.C is:

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

0.0095 = ر.ق66m ÷ (ر.ق10b - ر.ق3.4b) (Based on the trailing twelve months to March 2021).

Thus, Gulf International Services Q.P.S.C has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 6.2%.

View our latest analysis for Gulf International Services Q.P.S.C

In the above chart we have measured Gulf International Services Q.P.S.C's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Gulf International Services Q.P.S.C's ROCE Trend?

We are a bit worried about the trend of returns on capital at Gulf International Services Q.P.S.C. To be more specific, the ROCE was 8.0% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Gulf International Services Q.P.S.C to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Gulf International Services Q.P.S.C is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 60% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Like most companies, Gulf International Services Q.P.S.C does come with some risks, and we've found 1 warning sign that you should be aware of.

While Gulf International Services Q.P.S.C 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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