Returns on Capital Paint A Bright Future For Global Industrial (NYSE:GIC)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. 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 the ROCE trend of Global Industrial (NYSE:GIC) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Global Industrial is:

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

0.39 = US$114m ÷ (US$474m - US$180m) (Based on the trailing twelve months to September 2022).

Therefore, Global Industrial has an ROCE of 39%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 16%.

View our latest analysis for Global Industrial

Above you can see how the current ROCE for Global Industrial compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Global Industrial here for free.

What Does the ROCE Trend For Global Industrial Tell Us?

Global Industrial's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 94% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 38%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Global Industrial has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

To bring it all together, Global Industrial has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 29% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Global Industrial does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

Global Industrial is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.