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What are the first trends to look for to identify a title that could multiply over the long term? In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. Ultimately, this demonstrates that this is a company that reinvests its profits at increasing rates of return. Therefore, when we briefly examined Gamma Communications’ (LON: GAMA) Trend ROCE, we were very happy with what we saw.
Return on capital employed (ROCE): what is it?
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. The formula for this calculation on Gamma Communications is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.23 = £ 63million (£ 346million – £ 79million) (Based on the last twelve months up to June 2021).
Therefore, Gamma Communications has a ROCE of 24%. This is a fantastic return and not only that, it exceeds the 8.9% average earned by companies in a similar industry.
Check out our latest review for Gamma Communications
Above you can see how Gamma Communications’ current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you want, you can check out the analysts’ forecasts covering Gamma Communications here for free.
What is the trend for returns?
We would rather be satisfied with a return on capital like Gamma Communications. The company has steadily gained 24% over the past five years and the capital employed within the company has increased by 259% during this period. With such high returns, it’s great that the company can continually reinvest their money at such attractive rates of return. If Gamma Communications can keep up this pace, we would be very optimistic about its future.
The key to take away
In the end, the company has proven that it can reinvest its capital at high rates of return, which you will recall is a hallmark of a multi-bagger. On top of that, the stock rewarded shareholders with a remarkable 267% return for those who have held it in the past five years. So while the positive underlying trends can be explained by investors, we still believe this stock is worth looking into.
Gamma Communications does involve certain risks, however, and we have identified 2 warning signs for Gamma Communications that might interest you.
High yields are a key ingredient to strong performance, so check out our free list of stocks generating high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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