Generac Holdings (NYSE:GNRC) Hasn't Managed To Accelerate Its Returns

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Generac Holdings (NYSE:GNRC) looks decent, right now, so lets see what the trend of returns can tell us.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Generac Holdings is:

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

0.14 = US$568m ÷ (US$5.2b - US$992m) (Based on the trailing twelve months to December 2022).

Thus, Generac Holdings has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 12% generated by the Electrical industry.

View our latest analysis for Generac Holdings

In the above chart we have measured Generac Holdings' 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 Generac Holdings.

What The Trend Of ROCE Can Tell Us

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 156% more capital into its operations. 14% is a pretty standard return, and it provides some comfort knowing that Generac Holdings has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Our Take On Generac Holdings' ROCE

To sum it up, Generac Holdings has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 116% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Generac Holdings (of which 1 is a bit concerning!) that you should know about.

While Generac Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.