The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to better understand how you can grow your money by investing in Greif Inc (NYSE:GEF).
If you purchase a GEF share you are effectively becoming a partner with many other shareholders. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. To understand Greif’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.
Greif’s Return On Capital Employed
As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. 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. We’ll look at Greif’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. Take a look at the formula box beneath:
ROCE Calculation for GEF
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$299m ÷ (US$3.3b – US$680m) = 14%
The calculation above shows that GEF’s earnings were 14% of capital employed. This makes Greif slightly mediocre when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future, investor capital will be able to compound over time, but still may be missing out on some potential growth elsewhere.
Then why have investors invested?
The underperforming ROCE is not ideal for Greif investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, GEF’s ROCE may increase, in which case your portfolio could benefit from holding the company. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Three years ago, GEF’s ROCE was 10%, which means the company’s capital returns have improved. Similarly, the movement in the earnings variable shows a jump from US$225m to US$299m whilst the amount of capital employed has declined in response to a fall in total assets , which means that ROCE has increased as a result of Greif’s ability to grow earnings in conjunction with increased capital efficiency.
Although Greif’s ROCE is currently below the acceptable benchmark, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. It is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and valuation to determine whether there is potential for return by focusing our attention elsewhere. 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 GEF or move on to other alternatives.
- Future Outlook: What are well-informed industry analysts predicting for GEF’s future growth? Take a look at our free research report of analyst consensus for GEF’s outlook.
- Valuation: What is GEF 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 GEF 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.