Capital Investments At Gamma Communications (LON:GAMA) Point To A Promising Future

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Gamma Communications' (LON:GAMA) trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Gamma Communications is:

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

0.23 = UK£56m ÷ (UK£322m - UK£75m) (Based on the trailing twelve months to December 2020).

Therefore, Gamma Communications has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 8.0% earned by companies in a similar industry.

See our latest analysis for Gamma Communications

Above you can see how the current ROCE for Gamma Communications compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Gamma Communications.

What The Trend Of ROCE Can Tell Us

Gamma Communications deserves to be commended in regards to it's returns. The company has employed 260% more capital in the last five years, and the returns on that capital have remained stable at 23%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Gamma Communications can keep this up, we'd be very optimistic about its future.

The Bottom Line

In summary, we're delighted to see that Gamma Communications has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has done incredibly well with a 328% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you want to continue researching Gamma Communications, you might be interested to know about the 2 warning signs that our analysis has discovered.

Gamma Communications 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. 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.
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