Stock Analysis

General Motors (NYSE:GM) Has More To Do To Multiply In Value Going Forward

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NYSE:GM
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What trends should we look for it we want to identify stocks that can 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at General Motors (NYSE:GM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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 General Motors, this is the formula:

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

0.058 = US$11b ÷ (US$282b - US$97b) (Based on the trailing twelve months to September 2023).

Therefore, General Motors has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Auto industry average of 8.9%.

See our latest analysis for General Motors

roce
NYSE:GM Return on Capital Employed December 18th 2023

In the above chart we have measured General Motors' 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 report for General Motors.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for General Motors in recent years. The company has consistently earned 5.8% for the last five years, and the capital employed within the business has risen 31% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From General Motors' ROCE

Long story short, while General Motors has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 18% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Like most companies, General Motors does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Valuation is complex, but we're helping make it simple.

Find out whether General Motors is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.