What are the early trends we should look for to identify a stock that could 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, GMS (NYSE:GMS) looks quite promising in regards to its trends of return on capital.
Understanding 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. The formula for this calculation on GMS is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$411m ÷ (US$3.9b - US$708m) (Based on the trailing twelve months to July 2024).
Therefore, GMS has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Trade Distributors industry average of 12%.
In the above chart we have measured GMS' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for GMS .
What Can We Tell From GMS' ROCE Trend?
GMS is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 13%. The amount of capital employed has increased too, by 66%. So we're very much inspired by what we're seeing at GMS thanks to its ability to profitably reinvest capital.
The Bottom Line On GMS' ROCE
To sum it up, GMS has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 220% total return over the last five years tells us that investors are expecting more good things to come in the future. 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 more thing, we've spotted 1 warning sign facing GMS that you might find interesting.
While GMS isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.