Capital Allocation Trends At Graphic Packaging Holding (NYSE:GPK) Aren't Ideal

By
Simply Wall St
Published
April 20, 2022
NYSE:GPK
Source: Shutterstock

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Graphic Packaging Holding (NYSE:GPK), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Graphic Packaging Holding is:

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

0.068 = US$570m ÷ (US$10b - US$2.0b) (Based on the trailing twelve months to December 2021).

So, Graphic Packaging Holding has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 9.1%.

Check out our latest analysis for Graphic Packaging Holding

roce
NYSE:GPK Return on Capital Employed April 20th 2022

In the above chart we have measured Graphic Packaging Holding's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Graphic Packaging Holding's ROCE Trend?

In terms of Graphic Packaging Holding's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 11%, but since then they've fallen to 6.8%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Graphic Packaging Holding's ROCE

To conclude, we've found that Graphic Packaging Holding is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 76% 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 want to know some of the risks facing Graphic Packaging Holding we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While Graphic Packaging Holding 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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