Yahoo Finance The Returns On Capital At Gulf Marine Services (LON:GMS) Don't Inspire Confidence
When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Gulf Marine Services (LON:GMS), we weren't too hopeful.
Return On Capital Employed (ROCE): What is it?
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 Gulf Marine Services, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.038 = US$23m ÷ (US$654m - US$46m) (Based on the trailing twelve months to June 2021).
Thus, Gulf Marine Services has an ROCE of 3.8%. Even though it's in line with the industry average of 4.3%, it's still a low return by itself.
Check out our latest analysis for Gulf Marine Services
In the above chart we have measured Gulf Marine Services' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
In terms of Gulf Marine Services' historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 3.8% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 30% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
The Bottom Line On Gulf Marine Services' ROCE
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. This could explain why the stock has sunk a total of 89% in the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
Gulf Marine Services does have some risks, we noticed 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.
While Gulf Marine Services 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.
