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Genasys (NASDAQ:GNSS) Shareholders Will Want The ROCE Trajectory To Continue

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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Genasys' (NASDAQ:GNSS) returns on capital, so let's have a look.

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 Genasys:

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

0.017 = US$1.3m ÷ (US$90m - US$17m) (Based on the trailing twelve months to September 2021).

Therefore, Genasys has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 8.6%.

See our latest analysis for Genasys

roce
roce

Above you can see how the current ROCE for Genasys compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Genasys.

What Does the ROCE Trend For Genasys Tell Us?

We're delighted to see that Genasys is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 1.7% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Genasys is utilizing 109% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

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. The current liabilities has increased to 19% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

Long story short, we're delighted to see that Genasys' reinvestment activities have paid off and the company is now profitable. And a remarkable 106% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 3 warning signs with Genasys and understanding them should be part of your investment process.

While Genasys may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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