GSS Infotech's (NSE:GSS) Returns On Capital Are Heading Higher

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in GSS Infotech's (NSE:GSS) returns on capital, so let's have a look.

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. The formula for this calculation on GSS Infotech is:

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

0.006 = ₹8.3m ÷ (₹1.7b - ₹373m) (Based on the trailing twelve months to June 2021).

Therefore, GSS Infotech has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the IT industry average of 12%.

See our latest analysis for GSS Infotech

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 want to delve into the historical earnings, revenue and cash flow of GSS Infotech, check out these free graphs here.

What Does the ROCE Trend For GSS Infotech Tell Us?

Shareholders will be relieved that GSS Infotech has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.6% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

What We Can Learn From GSS Infotech's ROCE

To sum it up, GSS Infotech is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 216% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

GSS Infotech does have some risks though, and we've spotted 2 warning signs for GSS Infotech that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.
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