Returns Are Gaining Momentum At GMS (NYSE:GMS)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in GMS' (NYSE:GMS) 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 GMS, this is the formula:

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

0.19 = US$505m ÷ (US$3.2b - US$620m) (Based on the trailing twelve months to January 2023).

So, GMS has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Trade Distributors industry average of 16% it's much better.

View our latest analysis for GMS

Above you can see how the current ROCE for GMS compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For GMS Tell Us?

We like the trends that we're seeing from GMS. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 115% more capital is being employed now too. So we're very much inspired by what we're seeing at GMS thanks to its ability to profitably reinvest capital.

What We Can Learn From GMS' ROCE

All in all, it's terrific to see that GMS is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 77% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if GMS can keep these trends up, it could have a bright future ahead.

If you want to know some of the risks facing GMS we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

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.