Our Take On The Returns On Capital At Gale Pacific (ASX:GAP)

If you're looking for a multi-bagger, there's a few things to keep an eye out 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 briefly looking over the numbers, we don't think Gale Pacific (ASX:GAP) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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. The formula for this calculation on Gale Pacific is:

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

0.051 = AU$7.0m ÷ (AU$192m - AU$56m) (Based on the trailing twelve months to June 2020).

Therefore, Gale Pacific has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 24%.

See our latest analysis for Gale Pacific

roce

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Gale Pacific, check out these free graphs here.

So How Is Gale Pacific's ROCE Trending?

There are better returns on capital out there than what we're seeing at Gale Pacific. Over the past five years, ROCE has remained relatively flat at around 5.1% and the business has deployed 37% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

In conclusion, Gale Pacific has been investing more capital into the business, but returns on that capital haven't increased. And with the stock having returned a mere 37% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a final note, we found 5 warning signs for Gale Pacific (2 are a bit unpleasant) you should be aware of.

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.

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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