Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, GEPIC Energy Development (SZSE:000791) we aren't filled with optimism, but let's investigate further.
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. The formula for this calculation on GEPIC Energy Development is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.047 = CN¥891m ÷ (CN¥22b - CN¥2.8b) (Based on the trailing twelve months to September 2023).
So, GEPIC Energy Development has an ROCE of 4.7%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 5.6%.
View our latest analysis for GEPIC Energy Development
Historical performance is a great place to start when researching a stock so above you can see the gauge for GEPIC Energy Development's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of GEPIC Energy Development, check out these free graphs here.
What Does the ROCE Trend For GEPIC Energy Development Tell Us?
There is reason to be cautious about GEPIC Energy Development, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 6.6% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 GEPIC Energy Development becoming one if things continue as they have.
Our Take On GEPIC Energy Development's ROCE
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Yet despite these concerning fundamentals, the stock has performed strongly with a 82% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
On a final note, we found 4 warning signs for GEPIC Energy Development (2 can't be ignored) you should be aware of.
While GEPIC Energy Development may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.