Is Gaon Group (TLV:GAGR) A Future Multi-bagger?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 on that note, Gaon Group (TLV:GAGR) looks quite promising in regards to its trends of return on capital.

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

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. To calculate this metric for Gaon Group, this is the formula:

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

0.046 = ₪23m ÷ (₪843m - ₪347m) (Based on the trailing twelve months to September 2020).

Therefore, Gaon Group has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 7.6%.

Check out our latest analysis for Gaon Group

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're interested in investigating Gaon Group's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 4.6%. The amount of capital employed has increased too, by 42%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a separate but related note, it's important to know that Gaon Group has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

To sum it up, Gaon Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 189% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Gaon Group can keep these trends up, it could have a bright future ahead.

On a final note, we found 5 warning signs for Gaon Group (1 can't be ignored) you should be aware of.

While Gaon Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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