Returns on capital at Guerbet (EPA: GBT) do not inspire confidence

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If we are looking to avoid a declining business, what are some trends that can alert us ahead of time? Declining businesses often have two underlying trends, on the one hand, a decline to recover on capital employed (ROCE) and a decrease based capital employed. This tells us that the company is not only reducing the size of its net assets, but that its returns are also decreasing. And from the first reading, things don’t look very good Guerbet (EPA: GBT), so let’s see why.

Understanding Return on Capital Employed (ROCE)

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for Guerbet, here is the formula:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.057 = € 42m ÷ (€ 946m – € 200m) (Based on the last twelve months up to December 2020).

Thereby, Guerbet posts a ROCE of 5.7%. In absolute terms, this is low efficiency and it is also below the medical equipment industry average by 15%.

Check out our latest analysis for Guerbet

ENXTPA: GBT Return on capital employed on September 24, 2021

Above you can see how Guerbet’s current ROCE compares to its previous returns on equity, but there is little you can say about the past. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.

What to remember from Guerbet’s ROCE trend?

We are a little worried about the evolution of the profitability of capital at Guerbet. About five years ago, returns on capital were 9.4%, but they are now significantly lower than what we saw above. And on the capital employed front, the company is using roughly the same amount of capital as it was back in the day. This combination may be indicative of a mature company that still has areas to deploy capital, but the returns received are not as high potentially due to new competition or lower margins. If these trends continue, one would not expect Guerbet to transform into a multi-bagger.

In conclusion…

Overall, lower returns for the same amount of capital employed are not exactly the sign of a dialing machine. Long-term shareholders who held the stock for the past five years have experienced a 26% depreciation of their investment, so it looks like the market might not like these trends either. With underlying trends not being great in these areas, we would consider looking elsewhere.

One more thing to note, we have identified 3 warning signs with Guerbet and understanding them should be part of your investment process.

For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.

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