Yahoo Finance Gilat Satellite Networks (NASDAQ:GILT) Has Some Difficulty Using Its Capital Effectively
What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Gilat Satellite Networks (NASDAQ:GILT), the trends above didn't look too great.
Understanding 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. The formula for this calculation on Gilat Satellite Networks is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = US$7.7m ÷ (US$376m - US$121m) (Based on the trailing twelve months to June 2022).
So, Gilat Satellite Networks has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Communications industry average of 8.7%.
Check out our latest analysis for Gilat Satellite Networks
In the above chart we have measured Gilat Satellite Networks' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Gilat Satellite Networks here for free.
How Are Returns Trending?
There is reason to be cautious about Gilat Satellite Networks, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 5.4% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Gilat Satellite Networks becoming one if things continue as they have.
Our Take On Gilat Satellite Networks' ROCE
In summary, it's unfortunate that Gilat Satellite Networks is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 3.3% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
If you want to continue researching Gilat Satellite Networks, you might be interested to know about the 2 warning signs that our analysis has discovered.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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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