GSI Creos (TSE:8101) Is Looking To Continue Growing Its Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. So on that note, GSI Creos (TSE:8101) looks quite promising in regards to its trends of return on capital.

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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. Analysts use this formula to calculate it for GSI Creos:

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

0.11 = JP¥3.3b ÷ (JP¥79b - JP¥49b) (Based on the trailing twelve months to December 2024).

So, GSI Creos has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.6% generated by the Retail Distributors industry.

See our latest analysis for GSI Creos

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating GSI Creos' past further, check out this free graph covering GSI Creos' past earnings, revenue and cash flow .

The Trend Of ROCE

Investors would be pleased with what's happening at GSI Creos. The data shows that returns on capital have increased substantially over the last five years to 11%. The amount of capital employed has increased too, by 51%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Another thing to note, GSI Creos has a high ratio of current liabilities to total assets of 62%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On GSI Creos' ROCE

All in all, it's terrific to see that GSI Creos is reaping the rewards from prior investments and is growing its capital base. And a remarkable 356% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if GSI Creos can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with GSI Creos and understanding this should be part of your investment process.

While GSI Creos 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.