Under The Bonnet, Gaming Realms' (LON:GMR) Returns Look Impressive

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 Gaming Realms' (LON:GMR) returns on capital, so let's have a look.

Understanding 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 Gaming Realms:

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

0.22 = UK£6.3m ÷ (UK£32m - UK£3.5m) (Based on the trailing twelve months to June 2024).

So, Gaming Realms has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.

See our latest analysis for Gaming Realms

Above you can see how the current ROCE for Gaming Realms compares to its prior returns on capital, but there's only so much you can tell from the past. 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. The company was generating losses five years ago, but now it's earning 22% which is a sight for sore eyes. Not only that, but the company is utilizing 55% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 11%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Gaming Realms has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

Long story short, we're delighted to see that Gaming Realms' reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 395% 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.

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 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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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.