Should We Be Excited About The Trends Of Returns At GSS Infotech (NSE:GSS)?

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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at GSS Infotech (NSE:GSS), it didn't seem to tick all of these boxes.

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. The formula for this calculation on GSS Infotech is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.034 = ₹48m ÷ (₹1.7b - ₹307m) (Based on the trailing twelve months to June 2020).

Thus, GSS Infotech has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the IT industry average of 13%.

View our latest analysis for GSS Infotech

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how GSS Infotech has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is GSS Infotech's ROCE Trending?

Things have been pretty stable at GSS Infotech, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect GSS Infotech to be a multi-bagger going forward.

What We Can Learn From GSS Infotech's ROCE

We can conclude that in regards to GSS Infotech's returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 26% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you want to know some of the risks facing GSS Infotech we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While GSS Infotech isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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