Investors Will Want Gaon Group's (TLV:GAGR) Growth In ROCE To Persist

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Gaon Group (TLV:GAGR) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Gaon Group:

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

0.062 = ₪40m ÷ (₪1.0b - ₪385m) (Based on the trailing twelve months to March 2023).

Therefore, Gaon Group has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 9.5%.

Check out our latest analysis for Gaon Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gaon Group's ROCE against it's prior returns. If you'd like to look at how Gaon Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Gaon Group's ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 6.2%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 44%. So we're very much inspired by what we're seeing at Gaon Group thanks to its ability to profitably reinvest capital.

What We Can Learn From Gaon Group's ROCE

All in all, it's terrific to see that Gaon Group is reaping the rewards from prior investments and is growing its capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 20% to shareholders. So with that in mind, we think the stock deserves further research.

One more thing: We've identified 4 warning signs with Gaon Group (at least 2 which are potentially serious) , and understanding them would certainly be useful.

While Gaon Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.