What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Ergo, when we looked at the ROCE trends at Gamma Communications (LON:GAMA), we liked what we saw.

What Is 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. Analysts use this formula to calculate it for Gamma Communications:

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

0.22 = UK￡87m ÷ (UK￡497m - UK￡100m) (Based on the trailing twelve months to June 2024).

Thus, Gamma Communications has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 10.0% earned by companies in a similar industry.

See our latest analysis for Gamma Communications

Above you can see how the current ROCE for Gamma Communications compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Gamma Communications .

What Does the ROCE Trend For Gamma Communications Tell Us?

It's hard not to be impressed by Gamma Communications' returns on capital. The company has employed 150% more capital in the last five years, and the returns on that capital have remained stable at 22%. Now considering ROCE is an attractive 22%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

Our Take On Gamma Communications' ROCE

In short, we'd argue Gamma Communications has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Therefore it's no surprise that shareholders have earned a respectable 59% return if they held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

While Gamma Communications looks impressive, no company is worth an infinite price. The intrinsic value infographic for GAMA helps visualize whether it is currently trading for a fair price.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.