Some Investors May Be Worried About Gulf International Services Q.P.S.C's (DSM:GISS) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Gulf International Services Q.P.S.C (DSM:GISS), we weren't too upbeat about how things were going.

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)

0.019 = ر.ق136m ÷ (ر.ق9.9b - ر.ق2.8b) (Based on the trailing twelve months to December 2021).

Thus, Gulf International Services Q.P.S.C has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 6.5%.

See 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.

What Does the ROCE Trend For Gulf International Services Q.P.S.C Tell Us?

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 3.3% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Gulf International Services Q.P.S.C becoming one if things continue as they have.

What We Can Learn From Gulf International Services Q.P.S.C'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. It should come as no surprise then that the stock has fallen 31% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Gulf International Services Q.P.S.C we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.

While Gulf International Services Q.P.S.C isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.