Shareholders Would Enjoy A Repeat Of Gravity's (NASDAQ:GRVY) Recent Growth In Returns

By
Simply Wall St
Published
May 11, 2022
NasdaqGM:GRVY
Source: Shutterstock

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Gravity (NASDAQ:GRVY) looks great, so lets see what the trend can tell us.

What is 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. Analysts use this formula to calculate it for Gravity:

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

0.38 = ₩98b ÷ (₩328b - ₩74b) (Based on the trailing twelve months to December 2021).

Therefore, Gravity has an ROCE of 38%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 9.9%.

Check out our latest analysis for Gravity

roce
NasdaqGM:GRVY Return on Capital Employed May 11th 2022

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gravity's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Gravity, check out these free graphs here.

What Does the ROCE Trend For Gravity Tell Us?

Gravity is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 38%. 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 623%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 23%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On Gravity's ROCE

In summary, it's great to see that Gravity 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. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Gravity can keep these trends up, it could have a bright future ahead.

If you want to continue researching Gravity, you might be interested to know about the 1 warning sign that our analysis has discovered.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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