Here's What's Concerning About Gulf International Services Q.P.S.C's (DSM:GISS) Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Gulf International Services Q.P.S.C (DSM:GISS) we aren't filled with optimism, but let's investigate further.

What is 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 Gulf International Services Q.P.S.C is:

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

0.0078 = ر.ق56m ÷ (ر.ق10b - ر.ق3.1b) (Based on the trailing twelve months to September 2021).

Therefore, Gulf International Services Q.P.S.C has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 7.2%.

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

Above you can see how the current ROCE for Gulf International Services Q.P.S.C 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 Gulf International Services Q.P.S.C's ROCE Trending?

The trend of returns that Gulf International Services Q.P.S.C is generating are raising some concerns. To be more specific, today's ROCE was 3.9% five years ago but has since fallen to 0.8%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 21% over that same period. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

In Conclusion...

In summary, it's unfortunate that Gulf International Services Q.P.S.C is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 43% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing, we've spotted 1 warning sign facing Gulf International Services Q.P.S.C that you might find interesting.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.