Gosa Fom a.d (BELEX:GFOM) Is Looking To Continue Growing Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So when we looked at Gosa Fom a.d (BELEX:GFOM) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Gosa Fom a.d is:

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

0.10 = дин232m ÷ (дин8.8b - дин6.5b) (Based on the trailing twelve months to June 2023).

Thus, Gosa Fom a.d has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Machinery industry average of 12%.

View our latest analysis for Gosa Fom a.d

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gosa Fom a.d's ROCE against it's prior returns. If you'd like to look at how Gosa Fom a.d has performed in the past in other metrics, you can view this free graph of Gosa Fom a.d's past earnings, revenue and cash flow.

How Are Returns Trending?

Investors would be pleased with what's happening at Gosa Fom a.d. Over the last five years, returns on capital employed have risen substantially to 10%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 33%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 74% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line

In summary, it's great to see that Gosa Fom a.d can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing: We've identified 3 warning signs with Gosa Fom a.d (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

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.