The Returns On Capital At GSS Infotech (NSE:GSS) Don't Inspire Confidence

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at GSS Infotech (NSE:GSS) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 GSS Infotech, this is the formula:

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

0.0032 = ₹12m ÷ (₹5.4b - ₹1.7b) (Based on the trailing twelve months to September 2024).

Thus, GSS Infotech has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the IT industry average of 14%.

Check out 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'd like to look at how GSS Infotech has performed in the past in other metrics, you can view this free graph of GSS Infotech's past earnings, revenue and cash flow.

What Can We Tell From GSS Infotech's ROCE Trend?

In terms of GSS Infotech's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.3% from 4.6% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, GSS Infotech's current liabilities have increased over the last five years to 32% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that GSS Infotech is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 58% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

GSS Infotech does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

While GSS Infotech 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.