Here's What's Concerning About Graphic Packaging Holding's (NYSE:GPK) Returns On Capital

Simply Wall St
January 13, 2022
Source: Shutterstock

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. In light of that, when we looked at Graphic Packaging Holding (NYSE:GPK) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. To calculate this metric for Graphic Packaging Holding, this is the formula:

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

0.083 = US$567m ÷ (US$8.3b - US$1.5b) (Based on the trailing twelve months to September 2021).

Thus, Graphic Packaging Holding has an ROCE of 8.3%. In absolute terms, that's a low return but it's around the Packaging industry average of 10%.

Check out our latest analysis for Graphic Packaging Holding

NYSE:GPK Return on Capital Employed January 13th 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'd like, you can check out the forecasts from the analysts covering Graphic Packaging Holding here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Graphic Packaging Holding, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. However it looks like Graphic Packaging Holding might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

The Bottom Line On Graphic Packaging Holding's ROCE

In summary, Graphic Packaging Holding 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 69% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 4 warning signs for Graphic Packaging Holding you'll probably want to know about.

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.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.