If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think GP Industries (SGX:G20) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding 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. To calculate this metric for GP Industries, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = S$35m ÷ (S$1.4b - S$661m) (Based on the trailing twelve months to March 2023).
So, GP Industries has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 8.1%.
View our latest analysis for GP Industries
Historical performance is a great place to start when researching a stock so above you can see the gauge for GP Industries' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of GP Industries, check out these free graphs here.
How Are Returns Trending?
There are better returns on capital out there than what we're seeing at GP Industries. The company has consistently earned 4.9% for the last five years, and the capital employed within the business has risen 22% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
Another thing to note, GP Industries has a high ratio of current liabilities to total assets of 48%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From GP Industries' ROCE
In summary, GP Industries has simply been reinvesting capital and generating the same low rate of return as before. And investors may be recognizing these trends since the stock has only returned a total of 8.0% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.