This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between GATX Corporation (NYSE:GATX)’s return fundamentals and stock market performance.
GATX stock represents an ownership share in the company. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. Your return is tied to GATX’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Therefore, looking at how efficiently GATX is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
GATX’s Return On Capital Employed
When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. To determine GATX’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). Take a look at the formula box beneath:
ROCE Calculation for GATX
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$181m ÷ (US$7.5b – US$153m) = 2.5%
GATX’s 2.5% ROCE means that for every $100 you invest, the company creates $2.5. A good ROCE hurdle you should aim for in your investments is 15%, which GATX has missed by a wide margin, meaning the company creates a poor amount of earnings from capital employed.
Why is this the case?
The underperforming ROCE is not ideal for GATX investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, GATX’s ROCE may increase, in which case your portfolio could benefit from holding the company. Because of this, it is important to look beyond the final value of GATX’s ROCE and understand what is happening to the individual components. Three years ago, GATX’s ROCE was 3.3%, which means the company’s capital returns have worsened. In this time, earnings have fallen from US$221m to US$181m and capital employed has increased due to a hike in the level of total assets and decrease in current liabilities (less borrowed money) , which means the company’s ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.
GATX’s investors have experienced a downward trend in ROCE and it is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate GATX or move on to other alternatives.
- Future Outlook: What are well-informed industry analysts predicting for GATX’s future growth? Take a look at our free research report of analyst consensus for GATX’s outlook.
- Valuation: What is GATX worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether GATX is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.