GravitytaiLtd (GTSM:3629) Knows How To Allocate Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at GravitytaiLtd's (GTSM:3629) look very promising so lets take a look.

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 GravitytaiLtd:

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

0.23 = NT$114m ÷ (NT$823m - NT$318m) (Based on the trailing twelve months to September 2020).

Therefore, GravitytaiLtd has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Electronic industry average of 11%.

See our latest analysis for GravitytaiLtd

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 want to delve into the historical earnings, revenue and cash flow of GravitytaiLtd, check out these free graphs here.

The Trend Of ROCE

We're delighted to see that GravitytaiLtd is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 23% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, GravitytaiLtd is utilizing 208% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

What We Can Learn From GravitytaiLtd's ROCE

In summary, it's great to see that GravitytaiLtd has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 12% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 3 warning signs with GravitytaiLtd (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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