Yahoo Finance Returns On Capital At Gates Industrial (NYSE:GTES) Have Hit The Brakes
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Gates Industrial (NYSE:GTES), we don't think it's current trends fit the mold of a multi-bagger.
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. The formula for this calculation on Gates Industrial is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = US$424m ÷ (US$7.4b - US$789m) (Based on the trailing twelve months to April 2022).
So, Gates Industrial has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.9%.
Check out our latest analysis for Gates Industrial
Above you can see how the current ROCE for Gates Industrial compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Gates Industrial here for free.
What The Trend Of ROCE Can Tell Us
There hasn't been much to report for Gates Industrial's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Gates Industrial to be a multi-bagger going forward.
What We Can Learn From Gates Industrial's ROCE
We can conclude that in regards to Gates Industrial's returns on capital employed and the trends, there isn't much change to report on. Unsurprisingly, the stock has only gained 15% over the last three years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Gates Industrial does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
While Gates Industrial 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.
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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.
