Some Investors May Be Worried About Grand Green Energy's (GTSM:6639) Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Grand Green Energy (GTSM:6639), the trends above didn't look too great.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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).

So, Grand Green Energy has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 7.1%.

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're interested in investigating Grand Green Energy's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Grand Green Energy's ROCE Trending?

There is reason to be cautious about Grand Green Energy, given the returns are trending downwards. To be more specific, the ROCE was 3.4% four years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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.

The Key Takeaway

In summary, it's unfortunate that Grand Green Energy is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last year have experienced a 20% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 5 warning signs with Grand Green Energy (at least 1 which is significant) , and understanding them would certainly be useful.

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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