The Trend Of High Returns At Gaming Realms (LON:GMR) Has Us Very Interested

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Speaking of which, we noticed some great changes in Gaming Realms' (LON:GMR) returns on capital, so let's have a look.

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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. The formula for this calculation on Gaming Realms is:

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

0.23 = UK£8.0m ÷ (UK£39m - UK£4.1m) (Based on the trailing twelve months to December 2024).

So, Gaming Realms has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 12%.

Check out our latest analysis for Gaming Realms

In the above chart we have measured Gaming Realms' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Gaming Realms for free.

So How Is Gaming Realms' ROCE Trending?

The fact that Gaming Realms 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 23% on its capital. Not only that, but the company is utilizing 111% 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.

Our Take On Gaming Realms' ROCE

To the delight of most shareholders, Gaming Realms has now broken into profitability. And a remarkable 114% 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 Gaming Realms can keep these trends up, it could have a bright future ahead.

While Gaming Realms looks impressive, no company is worth an infinite price. The intrinsic value infographic for GMR helps visualize whether it is currently trading for a fair price.

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.