Be Wary Of GP Industries (SGX:G20) And Its Returns On Capital
What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at GP Industries (SGX:G20), it didn't seem to tick all of these boxes.
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 GP Industries, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.013 = S$9.2m ÷ (S$1.4b - S$661m) (Based on the trailing twelve months to March 2023).
Thus, GP Industries has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 8.2%.
View our latest analysis for GP Industries
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 want to delve into the historical earnings, revenue and cash flow of GP Industries, check out these free graphs here.
How Are Returns Trending?
On the surface, the trend of ROCE at GP Industries doesn't inspire confidence. To be more specific, ROCE has fallen from 5.5% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a side note, GP Industries' current liabilities are still rather high at 48% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Key Takeaway
In summary, GP Industries is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 10% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for GP Industries (of which 1 is potentially serious!) that you should know about.
While GP Industries isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
