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Here's What's Concerning About Gentrack Group's (NZSE:GTK) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at Gentrack Group (NZSE:GTK), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Gentrack Group is:

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

0.019 = NZ$3.5m ÷ (NZ$215m - NZ$34m) (Based on the trailing twelve months to March 2021).

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So, Gentrack Group has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Software industry average of 13%.

View our latest analysis for Gentrack Group

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Above you can see how the current ROCE for Gentrack Group 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 Gentrack Group here for free.

What The Trend Of ROCE Can Tell Us

In terms of Gentrack Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.9% from 19% five years ago. However it looks like Gentrack Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

In summary, Gentrack Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 22% in the last five years. Therefore based on the analysis done in this article, we don't think Gentrack Group has the makings of a multi-bagger.

If you want to continue researching Gentrack Group, you might be interested to know about the 2 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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