Capital returns at Gentex (NASDAQ:GNTX) paint a worrying picture

When it comes to investing, there are helpful financial metrics that can alert us when a business is potentially in trouble. More often than not we will see a decline come back on capital employed (ROCE) and a decrease amount capital employed. This indicates that the company is getting less profit from its investments and its total assets are decreasing. That said, after a quick look, Gentex (NASDAQ: GNTX) we are not filled with optimism, but deepen our research.

Return on capital employed (ROCE): what is it?

If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. Analysts use this formula to calculate it for Gentex:

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

0.20 = $379 million ÷ ($2.2 billion – $239 million) (Based on the last twelve months to March 2022).

Thereby, Gentex has a ROCE of 20%. In absolute terms, this is excellent performance and even better than the automotive components industry average of 9.0%.

See our latest analysis for Gentex

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In the chart above, we measured Gentex’s past ROCE against its past performance, but the future is arguably more important. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.

What the ROCE trend can tell us

In terms of Gentex’s historical ROCE movements, the trend does not inspire confidence. Unfortunately, capital returns have declined from the 25% they were earning five years ago. Meanwhile, the capital employed in the company remained roughly stable over the period. Companies that exhibit these attributes tend not to shrink, but they can be mature and face pressure on their margins from the competition. So because these trends are generally not conducive to creating a multi-bagger, we wouldn’t hold our breath for Gentex to become one if things continue as they have.

What we can learn from Gentex’s ROCE

Overall, lower returns from the same amount of capital employed are not exactly signs of a compounding machine. However, the stock has generated a 67% return for shareholders over the past five years, so investors might expect the tide to turn. Either way, we don’t feel too comfortable with the fundamentals, so we’d avoid this stock for now.

If you want to know the risks that Gentex faces, we have discovered 1 warning sign of which you should be aware.

If you want to see other businesses earning high returns, check out our free list of companies earning high returns with strong balance sheets here.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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