Shareholders Are Optimistic That Gamma Communications (LON:GAMA) Will Multiply In Value

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So, when we ran our eye over Gamma Communications' (LON:GAMA) trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Gamma Communications, this is the formula:

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 4.9% earned by companies in a similar industry.

Check out our latest analysis for Gamma Communications

In the above chart we have measured Gamma Communications' 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 Gamma Communications here for free.

What The Trend Of ROCE Can Tell Us

In terms of Gamma Communications' history of ROCE, it's quite impressive. The company has consistently earned 23% for the last five years, and the capital employed within the business has risen 260% in that time. 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.

In Conclusion...

In short, we'd argue Gamma Communications has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has done incredibly well with a 418% 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'd like to know about the risks facing Gamma Communications, we've discovered 1 warning sign that you should be aware of.

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.
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