If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Gurit Holding's (VTX:GUR) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Gurit Holding:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.29 = CHF64m ÷ (CHF377m - CHF157m) (Based on the trailing twelve months to December 2020).
So, Gurit Holding has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 13%.
Check out our latest analysis for Gurit Holding
Above you can see how the current ROCE for Gurit Holding 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 Does the ROCE Trend For Gurit Holding Tell Us?
Gurit Holding is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 59% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
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 42% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
What We Can Learn From Gurit Holding's ROCE
To sum it up, Gurit Holding is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 295% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Gurit Holding can keep these trends up, it could have a bright future ahead.
While Gurit Holding looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether GUR is currently trading for a fair price.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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About SWX:GURN
Gurit Holding
Develops, manufactures, markets, and sells advanced composite materials, composite tooling equipment, and kitting services in Switzerland and internationally.
Undervalued slight.