G-Tekt (TSE:5970) Has Some Way To Go To Become A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think G-Tekt (TSE:5970) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for G-Tekt:

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

0.063 = JP¥15b ÷ (JP¥321b - JP¥76b) (Based on the trailing twelve months to December 2024).

Therefore, G-Tekt has an ROCE of 6.3%. Even though it's in line with the industry average of 6.2%, it's still a low return by itself.

View our latest analysis for G-Tekt

Above you can see how the current ROCE for G-Tekt compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for G-Tekt .

How Are Returns Trending?

In terms of G-Tekt's historical ROCE trend, it doesn't exactly demand attention. The company has employed 44% more capital in the last five years, and the returns on that capital have remained stable at 6.3%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

As we've seen above, G-Tekt's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 76% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

G-Tekt could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 5970 on our platform quite valuable.

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.