Returns Are Gaining Momentum At Gale Pacific (ASX:GAP)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Gale Pacific (ASX:GAP) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Gale Pacific:

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

0.15 = AU$19m ÷ (AU$180m – AU$53m) (Based on the trailing twelve months to December 2020).

Thus, Gale Pacific has an ROCE of 15%. That’s a relatively normal return on capital, and it’s around the 18% generated by the Consumer Durables industry.

See our latest analysis for Gale Pacific

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gale Pacific’s ROCE against it’s prior returns. If you’d like to look at how Gale Pacific has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Gale Pacific’s ROCE Trending?

Investors would be pleased with what’s happening at Gale Pacific. The data shows that returns on capital have increased substantially over the last five years to 15%. The amount of capital employed has increased too, by 28%. So we’re very much inspired by what we’re seeing at Gale Pacific thanks to its ability to profitably reinvest capital.

In Conclusion…

To sum it up, Gale Pacific has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 47% to shareholders over the last five years, it’s fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we’ve spotted 3 warning signs facing Gale Pacific that you might find interesting.

While Gale Pacific 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. 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.
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