Be Wary Of G1 Secure Solutions (TLV:GOSS) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So while G1 Secure Solutions (TLV:GOSS) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on G1 Secure Solutions is:

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

0.23 = ₪45m ÷ (₪449m - ₪256m) (Based on the trailing twelve months to June 2023).

Therefore, G1 Secure Solutions has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Commercial Services industry average of 2.5%.

See our latest analysis for G1 Secure Solutions

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of G1 Secure Solutions, check out these free graphs here.

What Does the ROCE Trend For G1 Secure Solutions Tell Us?

In terms of G1 Secure Solutions' historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 42% where it was five years ago. However it looks like G1 Secure Solutions might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, G1 Secure Solutions has a high ratio of current liabilities to total assets of 57%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From G1 Secure Solutions' ROCE

In summary, G1 Secure Solutions is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 27% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think G1 Secure Solutions has the makings of a multi-bagger.

If you'd like to know more about G1 Secure Solutions, we've spotted 3 warning signs, and 1 of them can't be ignored.

G1 Secure Solutions 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. 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.