Slowing Rates Of Return At Gosa Fom a.d (BELEX:GFOM) Leave Little Room For Excitement

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Gosa Fom a.d (BELEX:GFOM) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. The formula for this calculation on Gosa Fom a.d is:

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

0.05 = дин80m ÷ (дин4.8b - дин3.2b) (Based on the trailing twelve months to December 2019).

Therefore, Gosa Fom a.d has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 8.4%.

View our latest analysis for Gosa Fom a.d

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Gosa Fom a.d, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Things have been pretty stable at Gosa Fom a.d, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Gosa Fom a.d to be a multi-bagger going forward.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 66% of total assets, this reported ROCE would probably be less than5.0% because total capital employed would be higher.The 5.0% ROCE could be even lower if current liabilities weren't 66% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

The Key Takeaway

In a nutshell, Gosa Fom a.d has been trudging along with the same returns from the same amount of capital over the last five years. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 119% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Gosa Fom a.d does have some risks, we noticed 5 warning signs (and 3 which are potentially serious) we think you should know about.

While Gosa Fom a.d 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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