Investors Should Be Encouraged By Gorilla Technology Group's (NASDAQ:GRRR) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at Gorilla Technology Group's (NASDAQ:GRRR) look very promising so lets take a look.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Gorilla Technology Group, this is the formula:

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

0.40 = US$31m ÷ (US$133m - US$55m) (Based on the trailing twelve months to June 2024).

Thus, Gorilla Technology Group has an ROCE of 40%. In absolute terms that's a great return and it's even better than the Software industry average of 8.6%.

See our latest analysis for Gorilla Technology Group

In the above chart we have measured Gorilla Technology Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Gorilla Technology Group for free.

So How Is Gorilla Technology Group's ROCE Trending?

Gorilla Technology Group has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 40% on its capital, because four years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 41% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On Gorilla Technology Group's ROCE

To sum it up, Gorilla Technology Group is collecting higher returns from the same amount of capital, and that's impressive. Given the stock has declined 40% in the last year, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to know some of the risks facing Gorilla Technology Group we've found 5 warning signs (3 are potentially serious!) that you should be aware of before investing here.

Gorilla Technology Group 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.