Slowing yield rates at GP Industries (SGX:G20) leave little room for enthusiasm

If we want to find a stock that has the potential to grow over the long term, what are the underlying trends we should look for? First, we would like to identify a growing sector back on capital employed (ROCE) and then at the same time, ever-increasing growth base capital employed. This shows us that it is a capitalization machine, capable of continually reinvesting its profits into the business and generating higher returns. However, after looking briefly at the numbers, we do not think GP Industries (SGX:G20) has the makings of a multi-bagger in the future, but let’s look at why that might be the case.

Understanding Return on Capital Employed (ROCE)

For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for GP Industries, here is the formula:

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

0.049 = S$35 million ÷ (S$1.4 billion – S$661 million) (Based on the last twelve months to March 2023).

SO, GP Industries has an ROCE of 4.9%. In absolute terms this is a low return and is also below the power sector average of 8.1%.

Check out our latest analysis for GP Industries

Historical performance is a great place to start when researching a stock. Above you can see GP Industries’ ROCE indicator compared to its past returns. If you want to dig deeper into GP Industries’ historical earnings, revenue and cash flow, check out these free graphics here.

What is the evolution of returns?

There are better returns on capital than we see at GP Industries. The company has consistently earned 4.9% over the past five years and capital employed within the company has increased by 22% over this period. Given that the company has increased the amount of capital employed, it appears that the investments made are simply not providing a high return on capital.

Another thing to note, GP Industries has a high current liabilities to total assets ratio of 48%. This can lead to some risks, as the business operates primarily by relying quite heavily on its suppliers or other types of short-term creditors. Ideally, we would like to see this reduction reduced as it would mean fewer risky bonds.

What we can learn from GP Industries’ ROCE

In summary, GP Industries simply reinvested its capital and generated the same low rate of return as before. And investors may recognize these trends since the stock has only returned a total of 8.0% to shareholders over the last five years. Therefore, if you are looking for a multi-bagger, we suggest you look at other options.

Finally, we found 4 Warning Signs for GP Industries (2 are a bit unpleasant) which you should be aware of.

Although GP Industries doesn’t generate the highest yield, take a look at this free list of companies that earn high returns on equity with strong balance sheets.

Any feedback on this article? Worried about the content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

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 constitute financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or your financial situation. Our goal is to provide you with targeted, long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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