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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Gorilla Technology Group's (NASDAQ:GRRR) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Gorilla Technology Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.40 = US$31m ÷ (US$133m - US$55m) (Based on the trailing twelve months to June 2024).
Therefore, Gorilla Technology Group has an ROCE of 40%. That's a fantastic return and not only that, it outpaces the average of 9.1% earned by companies in a similar industry.
Check out our latest analysis for Gorilla Technology Group
In the above chart we have measured Gorilla Technology Group's 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 Gorilla Technology Group for free.
What Can We Tell From Gorilla Technology Group's ROCE Trend?
Gorilla Technology Group has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses four years ago, but has managed to turn it around and as we saw earlier is now earning 40%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 41% of the business, which is more than it was four years ago. And with current liabilities at those levels, that's pretty high.