Will The ROCE Trend At Gatekeeper Systems (CVE:GSI) Continue?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in Gatekeeper Systems' (CVE:GSI) returns on capital, so let's have a look.

What is 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 Gatekeeper Systems:

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

0.19 = CA$2.5m ÷ (CA$15m - CA$1.9m) (Based on the trailing twelve months to November 2020).

Thus, Gatekeeper Systems has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 15% it's much better.

Check out 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 past earnings, revenue and cash flow.

What Can We Tell From Gatekeeper Systems' ROCE Trend?

We're delighted to see that Gatekeeper Systems is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 19% which is a sight for sore eyes. In addition to that, Gatekeeper Systems is employing 554% 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.

Our Take On Gatekeeper Systems' ROCE

To the delight of most shareholders, Gatekeeper Systems has now broken into profitability. Since the stock has returned a staggering 983% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.

If you want to know some of the risks facing Gatekeeper Systems we've found 4 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While Gatekeeper Systems 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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