New Zealand markets close in 6 hours 51 minutes
  • NZX 50

    11,090.03
    +130.58 (+1.19%)
     
  • NZD/USD

    0.5732
    +0.0007 (+0.11%)
     
  • ALL ORDS

    6,905.30
    +248.90 (+3.74%)
     
  • OIL

    86.37
    +2.74 (+3.28%)
     
  • GOLD

    1,734.80
    +32.80 (+1.93%)
     

Gresham Technologies (LON:GHT) Will Be Hoping To Turn Its Returns On Capital Around

·3-min read

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. However, after briefly looking over the numbers, we don't think Gresham Technologies (LON:GHT) 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. To calculate this metric for Gresham Technologies, this is the formula:

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

0.046 = UK£2.7m ÷ (UK£80m - UK£21m) (Based on the trailing twelve months to June 2022).

So, Gresham Technologies has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Software industry average of 7.4%.

View our latest analysis for Gresham Technologies

roce
roce

Above you can see how the current ROCE for Gresham Technologies 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 Gresham Technologies.

So How Is Gresham Technologies' ROCE Trending?

In terms of Gresham Technologies' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Gresham Technologies' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Gresham Technologies. These growth trends haven't led to growth returns though, since the stock has fallen 14% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to continue researching Gresham Technologies, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here