Investors Should Be Encouraged By GR Engineering Services' (ASX:GNG) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of GR Engineering Services (ASX:GNG) we really liked what we saw.

Understanding 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. To calculate this metric for GR Engineering Services, this is the formula:

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

0.44 = AU$18m ÷ (AU$123m - AU$83m) (Based on the trailing twelve months to December 2020).

So, GR Engineering Services has an ROCE of 44%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 9.5%.

See our latest analysis for GR Engineering Services

Above you can see how the current ROCE for GR Engineering Services compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From GR Engineering Services' ROCE Trend?

GR Engineering Services has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 40% over the trailing five years. The company is now earning AU$0.4 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 22% less than it was five years ago, which can be indicative of a business that's improving its efficiency. GR Engineering Services may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 67% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line

From what we've seen above, GR Engineering Services has managed to increase it's returns on capital all the while reducing it's capital base. And with a respectable 87% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. 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, we've spotted 1 warning sign facing GR Engineering Services that you might find interesting.

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