GLG's (ASX:GLE) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at GLG (ASX:GLE) 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 GLG:

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

0.16 = US$12m ÷ (US$151m - US$76m) (Based on the trailing twelve months to June 2021).

Therefore, GLG has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Luxury industry.

View our latest analysis for GLG

Historical performance is a great place to start when researching a stock so above you can see the gauge for GLG's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of GLG, check out these free graphs here.

So How Is GLG's ROCE Trending?

GLG is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 16%. The amount of capital employed has increased too, by 38%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a separate but related note, it's important to know that GLG has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

All in all, it's terrific to see that GLG is reaping the rewards from prior investments and is growing its capital base. Since the stock has only returned 18% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing: We've identified 6 warning signs with GLG (at least 2 which shouldn't be ignored) , and understanding these would certainly be useful.

While GLG 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 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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