Gates Industrial's Rising ROCE and Strategic Positioning for Long-Term Growth

Gates Industrial (NYSE: GTES) has long been a subject of scrutiny for its mixed performance in capital efficiency. However, recent developments suggest a compelling narrative is emerging. Over the past five years, the company's Return on Capital Employed (ROCE) has surged by 110%, climbing from a low of 3.4% in 2021 to a trailing twelve-month (TTM) ROCE of 7.8% as of June 2025. This trajectory, while still below the Machinery industry average of 12%, signals a meaningful shift in operational discipline. The ROCE calculation—derived from $507 million in EBIT divided by $6.5 billion in capital employed—reflects a company that has optimized its asset base without inflating capital expenditures.

The significance of this trend lies in its alignment with Gates' strategic reinvestment in high-growth sectors. The company has funneled resources into personal mobility, data center cooling, and industrial automation, areas where demand is surging and margins are expanding. For instance, its Data Master™ MegaFlex™ cooling hose, launched in April 2025, addresses the thermal challenges of high-density data centers, a market expected to grow at a 20% CAGR through 2030. Similarly, its e-bike power transmission solutions are capitalizing on the global shift toward sustainable transportation, with a $300 million+ opportunity pipeline. These initiatives are not speculative—they are underpinned by design wins with major players, including a U.S.-based server manufacturer and Asian electronics suppliers.

The company's reinvestment rate is equally noteworthy. In 2025, Gates has allocated capital to R&D-driven projects that promise cost parity with legacy technologies. For example, its belt-to-chain conversion innovations in industrial automation aim to reduce costs by 15–20% within 12–24 months, unlocking a $10 billion market. Meanwhile, its trailing twelve months return on invested capital (ROIC) of 21.3%—a figure that dwarfs its ROCE—highlights the effectiveness of these high-return projects. This discrepancy between ROCE and ROIC underscores a critical point: Gates is reinvesting profits into areas with higher margins, which should drive ROCE higher over time.

Critics may point to Gates' current ROCE of 5.7% (as of Q2 2025) and its lag behind peers like Otis (OTIS) and Illinois Tool Works (ITW). Yet this metric fails to capture the full picture. The company's balance sheet is strengthening, with a net leverage ratio of 2.2x and plans to reduce debt by $100 million in July 2025. This financial flexibility allows Gates to pursue aggressive reinvestment while maintaining a disciplined approach to capital allocation. Share repurchases and debt reduction are complementary to its growth strategy, ensuring that returns are distributed to shareholders even as capital is deployed in high-potential ventures.

The key question for investors is whether Gates can sustain its ROCE improvement. The answer lies in its ability to scale its strategic initiatives. In personal mobility, the company's focus on e-mountain bikes and value e-bikes—segments with high gross margins—positions it to capture a growing share of the $50 billion e-bike market. In data centers, its liquid cooling solutions are already generating multi-million-dollar design wins, with revenue potential accelerating in 2026. These are not one-off successes but part of a broader reinvention of Gates as a technology-driven industrial player.

For long-term investors, the case for Gates Industrial is clear. Its rising ROCE reflects a disciplined approach to capital efficiency, while its reinvestment in secular growth areas—personal mobility, data center cooling, and industrial automation—positions it to benefit from multi-year tailwinds. The company's ability to generate a 21.3% ROIC on these projects suggests that its ROCE will continue to climb as these initiatives scale.

However, risks remain. The data center cooling market is highly competitive, and Gates' ability to maintain its technological edge will be critical. Similarly, its industrial automation projects depend on the pace of chain-to-belt conversions, which could be slower than anticipated. Investors should monitor quarterly ROCE trends and reinvestment rates closely, but the current trajectory is encouraging.

In conclusion, Gates Industrial's strategic pivot toward high-return, high-growth sectors is reshaping its capital efficiency profile. While its ROCE still lags industry benchmarks, the upward trend and robust reinvestment strategy make it a compelling candidate for long-term capital appreciation. For those willing to bet on operational transformation and industrial innovation, Gates offers a rare combination of disciplined capital use and forward-looking growth.