Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. And in light of that, the trends we're seeing at Gravity's (NASDAQ:GRVY) look very promising so lets take a look.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Gravity:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.34 = ₩92b ÷ (₩342b - ₩73b) (Based on the trailing twelve months to March 2022).
Thus, Gravity has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 6.9%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Gravity's ROCE against it's prior returns. If you'd like to look at how Gravity has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Gravity Tell Us?
Investors would be pleased with what's happening at Gravity. Over the last five years, returns on capital employed have risen substantially to 34%. The amount of capital employed has increased too, by 632%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a related note, the company's ratio of current liabilities to total assets has decreased to 21%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Gravity has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Bottom Line On Gravity's ROCE
All in all, it's terrific to see that Gravity is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 454% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Gravity can keep these trends up, it could have a bright future ahead.
While Gravity looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether GRVY is currently trading for a fair price.
Gravity 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.
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.