Returns On Capital Are A Standout For Gatekeeper Systems (CVE:GSI)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Gatekeeper Systems (CVE:GSI) looks great, so lets see what the trend can tell us.

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

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 Gatekeeper Systems, this is the formula:

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

0.29 = CA$5.6m ÷ (CA$22m - CA$3.1m) (Based on the trailing twelve months to November 2023).

So, Gatekeeper Systems has an ROCE of 29%. On its own, that's a very good return and it's on par with the returns earned by companies in a similar industry.

View our latest analysis for Gatekeeper Systems

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 Gatekeeper Systems has performed in the past in other metrics, you can view this free graph of Gatekeeper Systems' past earnings, revenue and cash flow.

So How Is Gatekeeper Systems' ROCE Trending?

The fact that Gatekeeper Systems is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 29% which is a sight for sore eyes. Not only that, but the company is utilizing 197% more capital than before, but that's to be expected from a company trying to break into profitability. 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.

The Key Takeaway

Overall, Gatekeeper Systems gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 711% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 1 warning sign for Gatekeeper Systems you'll probably want to know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.