Yahoo Finance The Returns On Capital At Gooch & Housego (LON:GHH) Don't Inspire Confidence
Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Gooch & Housego (LON:GHH), we weren't too hopeful.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Gooch & Housego, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = UK£5.1m ÷ (UK£171m - UK£19m) (Based on the trailing twelve months to March 2024).
Thus, Gooch & Housego has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 13%.
See our latest analysis for Gooch & Housego
Above you can see how the current ROCE for Gooch & Housego compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Gooch & Housego .
What Can We Tell From Gooch & Housego's ROCE Trend?
In terms of Gooch & Housego's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 5.5%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Gooch & Housego to turn into a multi-bagger.
Our Take On Gooch & Housego's ROCE
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 56% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
On a separate note, we've found 2 warning signs for Gooch & Housego you'll probably want to know about.
While Gooch & Housego may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
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