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What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Gullewa (ASX:GUL), we don't think it's current trends fit the mold of a multi-bagger.
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 Gullewa, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = AU$2.5m ÷ (AU$18m - AU$256k) (Based on the trailing twelve months to December 2023).
Thus, Gullewa has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 11% it's much better.
View our latest analysis for Gullewa
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Gullewa's past further, check out this free graph covering Gullewa's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Unfortunately, the trend isn't great with ROCE falling from 19% five years ago, while capital employed has grown 130%. Usually this isn't ideal, but given Gullewa conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Gullewa probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
The Bottom Line On Gullewa's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Gullewa is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 115% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.
If you'd like to know more about Gullewa, we've spotted 3 warning signs, and 2 of them are significant.