What Do The Returns On Capital At GS Retail (KRX:007070) Tell Us?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at GS Retail (KRX:007070), it didn't seem to tick all of these boxes.

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 GS Retail:

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

0.05 = ₩277b ÷ (₩7.6t - ₩2.2t) (Based on the trailing twelve months to September 2020).

Thus, GS Retail has an ROCE of 5.0%. In absolute terms, that's a low return, but it's much better than the Consumer Retailing industry average of 4.1%.

Check out our latest analysis for GS Retail

In the above chart we have measured GS Retail's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering GS Retail here for free.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at GS Retail. Over the past five years, ROCE has remained relatively flat at around 5.0% and the business has deployed 40% more capital into its operations. 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...

In conclusion, GS Retail has been investing more capital into the business, but returns on that capital haven't increased. And in the last five years, the stock has given away 29% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think GS Retail has the makings of a multi-bagger.

One more thing to note, we've identified 2 warning signs with GS Retail and understanding them should be part of your investment process.

While GS Retail 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. 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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