The Return Trends At Gosa Fom a.d (BELEX:GFOM) Look Promising

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Gosa Fom a.d's (BELEX:GFOM) returns on capital, so let's have a look.

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. To calculate this metric for Gosa Fom a.d, this is the formula:

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).

So, 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%.

See 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 past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Gosa Fom a.d is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably 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.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. 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 Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Gosa Fom a.d has. And a remarkable 246% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Gosa Fom a.d does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Gosa Fom a.d 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.