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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Speaking of which, we noticed some great changes in Goldplat's (LON:GDP) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
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 Goldplat:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = UK£5.3m ÷ (UK£40m - UK£20m) (Based on the trailing twelve months to December 2021).
Thus, Goldplat has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Goldplat's ROCE against it's prior returns. If you'd like to look at how Goldplat has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Goldplat's ROCE Trending?
Goldplat has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 219% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
Another thing to note, Goldplat has a high ratio of current liabilities to total assets of 51%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
In summary, we're delighted to see that Goldplat has been able to increase efficiencies and earn higher rates of return on the same amount of capital.
Goldplat does have some risks though, and we've spotted 2 warning signs for Goldplat that you might be interested in.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.