There's Been No Shortage Of Growth Recently For Gilat Telecom Global's (TLV:GLTL) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 on that note, Gilat Telecom Global (TLV:GLTL) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Gilat Telecom Global, this is the formula:

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

0.038 = US$733k ÷ (US$44m - US$25m) (Based on the trailing twelve months to September 2023).

So, Gilat Telecom Global has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Telecom industry average of 12%.

Check out our latest analysis for Gilat Telecom Global

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gilat Telecom Global's ROCE against it's prior returns. If you're interested in investigating Gilat Telecom Global's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Gilat Telecom Global's ROCE Trend?

It's great to see that Gilat Telecom Global has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Gilat Telecom Global is using 42% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 56% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Gilat Telecom Global's ROCE

In summary, it's great to see that Gilat Telecom Global has been able to turn things around and earn higher returns on lower amounts of capital. Given the stock has declined 55% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing to note, we've identified 3 warning signs with Gilat Telecom Global and understanding these should be part of your investment process.

While Gilat Telecom Global 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.