Stock Analysis

A Look Into Graco's (NYSE:GGG) Impressive Returns On Capital

NYSE:GGG
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There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So, when we ran our eye over Graco's (NYSE:GGG) trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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

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

0.28 = US$573m ÷ (US$2.4b - US$400m) (Based on the trailing twelve months to December 2022).

So, Graco has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

See our latest analysis for Graco

roce
NYSE:GGG Return on Capital Employed February 8th 2023

In the above chart we have measured Graco'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 report for Graco.

The Trend Of ROCE

Graco deserves to be commended in regards to it's returns. The company has employed 78% more capital in the last five years, and the returns on that capital have remained stable at 28%. Now considering ROCE is an attractive 28%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

The Key Takeaway

In summary, we're delighted to see that Graco has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Therefore it's no surprise that shareholders have earned a respectable 74% return if they held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

While Graco looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether GGG is currently trading for a fair price.

Graco 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.

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

Find out whether Graco 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.

View the Free Analysis

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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.