Slowing GEA Group (ETR:G1A) Rates of Return Leave Little Room for Enthusiasm

There are a few key trends to watch if we want to identify the next multi-bagger. Typically, we’ll want to notice a growth trend back on capital employed (ROCE) and at the same time, growth base of capital employed. This shows us that it is a capitalization machine, capable of continually reinvesting its profits in the company and generating higher returns. However, after investigation GEA Group (ETR:G1A), we don’t think current trends fit the mold of a multi-bagger.

What is Return on Capital Employed (ROCE)?

Just to clarify if you’re not sure, ROCE is a metric for assessing the pre-tax income (as a percentage) a company earns on the capital invested in its business. Analysts use this formula to calculate it for the GEA group:

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

0.061 = 210 million euros ÷ (5.9 billion euros – 2.5 billion euros) (Based on the last twelve months to September 2022).

SO, The GEA Group has an ROCE of 6.1%. In absolute terms, this is a low return and is also below the machinery sector average of 8.8%.

Check out our latest analysis for GEA Group

In the chart above, we’ve compared GEA Group’s historical ROCE to its past performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering GEA Group here for free.

What is the evolution of returns?

Over the past five years, GEA Group’s ROCE and capital employed have remained broadly stable. This is not uncommon when looking at a mature, stable company that is not reinvesting its earnings because it is likely past that phase of the business cycle. So don’t be surprised if GEA Group doesn’t become a multi-bagger in a few years. With fewer investment opportunities, it makes sense for GEA Group to pay out 45% of its earnings to shareholders. Unless companies have very attractive growth opportunities, they will typically return cash to shareholders.

Furthermore, GEA Group’s current liabilities are still quite high, at 42% of total assets. This effectively means that suppliers (or short-term creditors) are financing a large part of the business. So, one should be aware that this can introduce some elements of risk. While this is not necessarily a bad thing, it can be beneficial to have this ratio lower.

The essential

We can conclude that when it comes to GEA Group’s returns on capital employed and trends, there is not much change to report. Unsurprisingly, the stock has only gained 14% over the past five years, which could indicate that investors are considering it going forward. Therefore, if you are looking for a multi-bagger, we suggest you look at other options.

Even though GEA Group doesn’t shine very brightly in this regard, it’s still worth seeing if the company is trading at attractive prices. You can find out with our FREE Intrinsic Value Estimate on our platform.

While GEA Group is not currently generating the highest returns, we have compiled a list of companies that are currently generating a return on equity of over 25%. Check it out free list here.

Do you have any comments on this article? Are you concerned about its 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. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. Our goal is to provide you with focused, long-term analysis based on fundamental data. Please note that our analysis may not factor in the latest price-sensitive company announcements or qualitative information. Simply Wall St has no position in any of the stocks mentioned.

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