Gencor Industries' (NASDAQ:GENC) Returns Have Hit A Wall

By
Simply Wall St
Published
April 09, 2021
NasdaqGM:GENC

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Gencor Industries (NASDAQ:GENC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Gencor Industries:

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

0.02 = US$3.3m ÷ (US$173m - US$8.7m) (Based on the trailing twelve months to December 2020).

Thus, Gencor Industries has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.4%.

Check out our latest analysis for Gencor Industries

roce
NasdaqGM:GENC Return on Capital Employed April 9th 2021

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

What The Trend Of ROCE Can Tell Us

In terms of Gencor Industries' historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 2.0% and the business has deployed 44% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On Gencor Industries' ROCE

As we've seen above, Gencor Industries' returns on capital haven't increased but it is reinvesting in the business. And with the stock having returned a mere 39% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Gencor Industries does have some risks though, and we've spotted 2 warning signs for Gencor Industries that you might be interested in.

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. 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.
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