GKW (NSE:GKWLIMITED) Will Want To Turn Around Its Return Trends

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating GKW (NSE:GKWLIMITED), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on GKW is:

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

0.0085 = ₹245m ÷ (₹29b - ₹154m) (Based on the trailing twelve months to December 2023).

Therefore, GKW has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 18%.

Check out our latest analysis for GKW

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at GKW, we didn't gain much confidence. To be more specific, ROCE has fallen from 3.5% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that GKW is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 106% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for GKW (of which 1 doesn't sit too well with us!) that you should know about.

While GKW 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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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.