Why The 29% Return On Capital At Gatekeeper Systems (CVE:GSI) Should Have Your Attention

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, the ROCE of Gatekeeper Systems (CVE:GSI) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Gatekeeper Systems:

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

0.29 = CA$4.5m ÷ (CA$19m - CA$3.2m) (Based on the trailing twelve months to May 2023).

Therefore, Gatekeeper Systems has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Electronic industry average of 15%.

Check out 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'd like to look at how Gatekeeper Systems has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Gatekeeper Systems' ROCE Trending?

We're delighted to see that Gatekeeper Systems is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 29% on its capital. In addition to that, Gatekeeper Systems is employing 112% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

What We Can Learn From Gatekeeper Systems' ROCE

In summary, it's great to see that Gatekeeper Systems has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Gatekeeper Systems can keep these trends up, it could have a bright future ahead.

Gatekeeper Systems does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

Gatekeeper Systems is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.