Gullberg & Jansson (NGM:GJAB) Will Be Hoping To Turn Its Returns On Capital Around

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Gullberg & Jansson (NGM:GJAB) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Gullberg & Jansson, this is the formula:

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

0.006 = kr1.4m ÷ (kr303m - kr66m) (Based on the trailing twelve months to June 2023).

Therefore, Gullberg & Jansson has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Leisure industry average of 17%.

Check out our latest analysis for Gullberg & Jansson

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gullberg & Jansson's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Gullberg & Jansson, check out these free graphs here.

The Trend Of ROCE

In terms of Gullberg & Jansson's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.6% from 2.9% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Gullberg & Jansson has decreased its current liabilities to 22% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Gullberg & Jansson's ROCE

We're a bit apprehensive about Gullberg & Jansson because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 518% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know more about Gullberg & Jansson, we've spotted 2 warning signs, and 1 of them can't be ignored.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.