GSS Infotech (NSE:GSS) Is Looking To Continue Growing Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at GSS Infotech (NSE:GSS) 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 GSS Infotech:

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

0.035 = ₹62m ÷ (₹2.0b - ₹242m) (Based on the trailing twelve months to June 2022).

Thus, GSS Infotech has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the IT industry average of 14%.

Our analysis indicates that GSS is potentially undervalued!

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

So How Is GSS Infotech's ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 3.5%. Basically the business is earning more per dollar of capital invested and in addition to that, 74% more capital is being employed now too. So we're very much inspired by what we're seeing at GSS Infotech thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 12%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On GSS Infotech's ROCE

All in all, it's terrific to see that GSS Infotech is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 977% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if GSS Infotech can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing GSS Infotech, we've discovered 2 warning signs that you should be aware of.

While GSS Infotech 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.