To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at GSS Energy (Catalist:41F) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on GSS Energy is:

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

0.056 = S$4.4m ÷ (S$144m - S$66m) (Based on the trailing twelve months to June 2022).

Therefore, GSS Energy has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 9.6%.

Check out our latest analysis for GSS Energy

Historical performance is a great place to start when researching a stock so above you can see the gauge for GSS Energy's ROCE against it's prior returns. If you're interested in investigating GSS Energy's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From GSS Energy's ROCE Trend?

When we looked at the ROCE trend at GSS Energy, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.6% from 13% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 46%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by GSS Energy's reinvestment in its own business, we're aware that returns are shrinking. Moreover, since the stock has crumbled 74% over the last five years, it appears investors are expecting the worst. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing, we've spotted 3 warning signs facing GSS Energy that you might find interesting.

While GSS Energy 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.

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.

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