Returns On Capital Are Showing Encouraging Signs At GEO Group (NYSE:GEO)
If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at GEO Group (NYSE:GEO) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for GEO Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$361m ÷ (US$3.7b - US$429m) (Based on the trailing twelve months to December 2023).
Therefore, GEO Group has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.3% generated by the Commercial Services industry.
View our latest analysis for GEO Group
In the above chart we have measured GEO Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for GEO Group .
How Are Returns Trending?
GEO Group has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 48% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Key Takeaway
In summary, we're delighted to see that GEO Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 24% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.
One more thing, we've spotted 1 warning sign facing GEO Group that you might find interesting.
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.
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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.
