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There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Gatekeeper Systems (CVE:GSI) looks great, so lets see what the trend can tell us.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Gatekeeper Systems, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = CA$4.3m ÷ (CA$24m - CA$2.9m) (Based on the trailing twelve months to May 2024).
Thus, Gatekeeper Systems has an ROCE of 20%. In absolute terms that's a very respectable return and compared to the Electronic industry average of 17% it's pretty much on par.
See our latest analysis for Gatekeeper Systems
Historical performance is a great place to start when researching a stock so above you can see the gauge for Gatekeeper Systems' ROCE against it's prior returns. If you're interested in investigating Gatekeeper Systems' past further, check out this free graph covering Gatekeeper Systems' past earnings, revenue and cash flow.
What Does the ROCE Trend For Gatekeeper Systems Tell Us?
We're delighted to see that Gatekeeper Systems is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 20% on its capital. In addition to that, Gatekeeper Systems is employing 217% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
What We Can Learn From Gatekeeper Systems' ROCE
Overall, Gatekeeper Systems gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 269% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Gatekeeper Systems can keep these trends up, it could have a bright future ahead.