There Are Reasons To Feel Uneasy About G1 Secure Solutions' (TLV:GOSS) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So while G1 Secure Solutions (TLV:GOSS) has a high ROCE right now, lets see what we can decipher from how returns are changing.

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. Analysts use this formula to calculate it for G1 Secure Solutions:

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

0.28 = ₪56m ÷ (₪438m - ₪242m) (Based on the trailing twelve months to December 2020).

So, G1 Secure Solutions has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 8.5% earned by companies in a similar industry.

Check out 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.

The Trend Of ROCE

On the surface, the trend of ROCE at G1 Secure Solutions doesn't inspire confidence. Historically returns on capital were even higher at 36%, but they have dropped over the last four years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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 55%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On G1 Secure Solutions' ROCE

To conclude, we've found that G1 Secure Solutions is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 25% over the last year. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

G1 Secure Solutions does have some risks though, and we've spotted 1 warning sign for G1 Secure Solutions that you might be interested in.

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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