Gates Industrial's ROCE Trend Indicates Promising Future Growth

Gates Industrial's return on capital employed (ROCE) has risen by 110% over the last five years, despite a relatively flat capital employed in the business. This trend suggests that the company has increased efficiencies to generate higher returns, and management's growth plans could further boost investor confidence.

Title: Gates Industrial's Rising ROCE: A Sign of Operational Efficiency and Future Growth

Gates Industrial Corporation (GTES) has demonstrated remarkable resilience in the face of rising inflation and other market challenges. One notable indicator of the company's performance is its return on capital employed (ROCE), which has risen by an impressive 110% over the last five years. This increase, despite relatively flat capital employed, suggests that Gates Industrial has significantly enhanced its operational efficiencies.

Understanding ROCE

ROCE is a metric that evaluates how much pre-tax income a company earns on the capital invested in its business. For Gates Industrial, ROCE is calculated as follows:

\[ \text{ROCE} = \frac{\text{EBIT}}{\text{Total Assets} - \text{Current Liabilities}} \]

Using the provided data, Gates Industrial's ROCE is 7.8% [2]. This figure, while slightly lower than the machinery industry average of 12%, indicates that the company is generating higher returns on its capital employed compared to previous years.

Analyzing the Trend

Over the last five years, Gates Industrial has managed to increase its ROCE without needing to invest additional capital. This trend is a positive sign of operational efficiency. The company has been able to generate higher returns by improving its business model and increasing its profitability per unit of capital.

Management's Growth Plans

Management's growth plans could further boost investor confidence. CEO Ivo Jurek highlighted the "continued ramp-up of new design wins" in personal mobility and noted the company's strength in the replacement channel and ongoing progress in margin improvement initiatives [3]. These strategic moves align with the company's ability to generate higher returns on its capital employed.

Conclusion

Gates Industrial's rising ROCE indicates that the company has successfully increased operational efficiencies and generated higher returns. This trend, coupled with management's growth plans, suggests a promising future for the company. While the current ROCE is slightly below the industry average, the company's ability to improve its returns on capital employed without additional investments is a strong indicator of its financial health.

References
- [1] https://www.ainvest.com/news/assessing-impact-rising-inflation-industrial-sector-stocks-orion-mercury-systems-gates-industrial-corporation-buy-opportunities-2508/
- [2] https://ca.finance.yahoo.com/news/gates-industrial-nyse-gtes-doing-191551805.html
- [3] https://finance.yahoo.com/news/5-most-interesting-analyst-questions-035842594.html