Here's What's Concerning About Gentex's (NASDAQ:GNTX) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at Gentex (NASDAQ:GNTX), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Gentex is:

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

0.21 = US$496m ÷ (US$2.6b - US$272m) (Based on the trailing twelve months to December 2023).

So, Gentex has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Auto Components industry average of 11%.

Check out our latest analysis for Gentex

In the above chart we have measured Gentex's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Gentex .

What Does the ROCE Trend For Gentex Tell Us?

We weren't thrilled with the trend because Gentex's ROCE has reduced by 20% over the last five years, while the business employed 22% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Gentex might not have received a full period of earnings contribution from it.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Gentex is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 61% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Gentex could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for GNTX on our platform quite valuable.

Gentex is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.