Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. With that in mind, we’ve noticed some promising trends at Gibraltar Industries (NASDAQ:ROCK) so let’s look a bit deeper.
Understanding Return On Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Gibraltar Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.14 = US$114m ÷ (US$1.0b – US$240m) (Based on the trailing twelve months to June 2020).
So, Gibraltar Industries has an ROCE of 14%. That’s a relatively normal return on capital, and it’s around the 13% generated by the Building industry.
In the above chart we have measured Gibraltar Industries’ 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 Gibraltar Industries here for free.
What Can We Tell From Gibraltar Industries’ ROCE Trend?
Gibraltar Industries has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 142% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it’s worth investigating what the management team has planned for long term growth prospects.
Our Take On Gibraltar Industries’ ROCE
As discussed above, Gibraltar Industries appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with the stock having performed exceptionally well over the last five years, these trends are being accounted for by investors. So given the stock has proven it has promising trends, it’s worth researching the company further to see if these trends are likely to persist.
One more thing to note, we’ve identified 1 warning sign with Gibraltar Industries and understanding this should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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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