The Trend Of High Returns At GMS (NYSE:GMS) Has Us Very Interested

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. And in light of that, the trends we're seeing at GMS' (NYSE:GMS) look very promising so lets take a look.

Understanding 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. The formula for this calculation on GMS is:

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

0.20 = US$501m ÷ (US$3.2b - US$681m) (Based on the trailing twelve months to October 2022).

Therefore, GMS has an ROCE of 20%. 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 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?

The trends we've noticed at GMS are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 20%. The amount of capital employed has increased too, by 113%. So we're very much inspired by what we're seeing at GMS thanks to its ability to profitably reinvest capital.

The Key Takeaway

In summary, it's great to see that GMS 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. Since the stock has returned a solid 45% 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.

One final note, you should learn about the 3 warning signs we've spotted with GMS (including 1 which makes us a bit uncomfortable) .

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.