Greif (NYSE:GEF) Will Want To Turn Around Its Return Trends

By
Simply Wall St
Published
August 27, 2021
NYSE:GEF
Source: Shutterstock

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Greif (NYSE:GEF) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Greif:

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

0.087 = US$388m ÷ (US$5.6b - US$1.1b) (Based on the trailing twelve months to April 2021).

Therefore, Greif has an ROCE of 8.7%. In absolute terms, that's a low return but it's around the Packaging industry average of 10%.

View our latest analysis for Greif

roce
NYSE:GEF Return on Capital Employed August 27th 2021

Above you can see how the current ROCE for Greif compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Greif here for free.

So How Is Greif's ROCE Trending?

When we looked at the ROCE trend at Greif, we didn't gain much confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 8.7%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Greif's ROCE

In summary, Greif is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 65% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know about the risks facing Greif, we've discovered 1 warning sign that you should be aware of.

While Greif may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.
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