Returns On Capital Signal Tricky Times Ahead For Gilat Satellite Networks (NASDAQ:GILT)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Gilat Satellite Networks (NASDAQ:GILT), we don't think it's current trends fit the mold of a multi-bagger.

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What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Gilat Satellite Networks, this is the formula:

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

0.066 = US$22m ÷ (US$430m - US$101m) (Based on the trailing twelve months to December 2024).

Therefore, Gilat Satellite Networks has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Communications industry average of 9.0%.

View our latest analysis for Gilat Satellite Networks

Above you can see how the current ROCE for Gilat Satellite Networks 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 Gilat Satellite Networks for free.

So How Is Gilat Satellite Networks' ROCE Trending?

On the surface, the trend of ROCE at Gilat Satellite Networks doesn't inspire confidence. Around five years ago the returns on capital were 9.6%, but since then they've fallen to 6.6%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Gilat Satellite Networks. These growth trends haven't led to growth returns though, since the stock has fallen 13% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Gilat Satellite Networks does have some risks though, and we've spotted 1 warning sign for Gilat Satellite Networks that you might be interested in.

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.