Gatekeeper Systems (CVE:GSI) Is Experiencing Growth In Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So when we looked at Gatekeeper Systems (CVE:GSI) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Gatekeeper Systems is:

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

0.088 = CA$1.2m ÷ (CA$23m - CA$8.9m) (Based on the trailing twelve months to August 2022).

Therefore, Gatekeeper Systems has an ROCE of 8.8%. In absolute terms, that's a low return but it's around the Electronic industry average of 9.9%.

See our latest analysis for Gatekeeper Systems

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gatekeeper Systems' ROCE against it's prior returns. If you're interested in investigating Gatekeeper Systems' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

The fact that Gatekeeper Systems is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 8.8% on its capital. And unsurprisingly, like most companies trying to break into the black, Gatekeeper Systems is utilizing 76% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

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. Effectively this means that suppliers or short-term creditors are now funding 39% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

To the delight of most shareholders, Gatekeeper Systems has now broken into profitability. And with a respectable 81% 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. Therefore, we think it would be worth your time to check if these trends are going to continue.

Gatekeeper Systems does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

While Gatekeeper Systems may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.