Is This A Sign of Things To Come At Grand Green Energy (GTSM:6639)?

What financial metrics can indicate to us that a company is maturing or even in decline? 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. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Grand Green Energy (GTSM:6639) we aren't filled with optimism, but let's investigate further.

What is 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. To calculate this metric for Grand Green Energy, this is the formula:

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

0.016 = NT$8.2m ÷ (NT$629m - NT$120m) (Based on the trailing twelve months to June 2020).

Thus, Grand Green Energy has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 7.2%.

View our latest analysis for Grand Green Energy

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'd like to look at how Grand Green Energy has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Grand Green Energy Tell Us?

There is reason to be cautious about Grand Green Energy, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 3.4% that they were earning four years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Grand Green Energy becoming one if things continue as they have.

What We Can Learn From Grand Green Energy's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 40% over the last year, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 5 warning signs we've spotted with Grand Green Energy (including 1 which doesn't sit too well with us) .

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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