Yahoo Finance Trends At Gamma Communications (LON:GAMA) Point To A Promising Future
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. That's why when we briefly looked at Gamma Communications' (LON:GAMA) ROCE trend, we were very happy with what we saw.
Return On Capital Employed (ROCE): What is it?
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. The formula for this calculation on Gamma Communications is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = UK£46m ÷ (UK£238m - UK£60m) (Based on the trailing twelve months to December 2019).
Thus, Gamma Communications has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 7.2% earned by companies in a similar industry.
Check out our latest analysis for Gamma Communications
In the above chart we have measured Gamma Communications' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Gamma Communications.
What Can We Tell From Gamma Communications' ROCE Trend?
It's hard not to be impressed by Gamma Communications' returns on capital. The company has consistently earned 26% for the last five years, and the capital employed within the business has risen 242% in that time. Now considering ROCE is an attractive 26%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Gamma Communications can keep this up, we'd be very optimistic about its future.
What We Can Learn From Gamma Communications' ROCE
In summary, we're delighted to see that Gamma Communications has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And long term investors would be thrilled with the 549% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
If you want to continue researching Gamma Communications, you might be interested to know about the 2 warning signs that our analysis has discovered.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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