Genuine Parts (NYSE:GPC) Is Doing The Right Things To Multiply Its Share Price

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Genuine Parts (NYSE:GPC) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Genuine Parts is:

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

0.19 = US$1.7b ÷ (US$16b - US$7.7b) (Based on the trailing twelve months to December 2022).

So, Genuine Parts has an ROCE of 19%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Retail Distributors industry average of 23%.

See our latest analysis for Genuine Parts

In the above chart we have measured Genuine Parts' 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 Genuine Parts here for free.

The Trend Of ROCE

We like the trends that we're seeing from Genuine Parts. The data shows that returns on capital have increased substantially over the last five years to 19%. The amount of capital employed has increased too, by 27%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Another thing to note, Genuine Parts has a high ratio of current liabilities to total assets of 47%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Genuine Parts' ROCE

All in all, it's terrific to see that Genuine Parts is reaping the rewards from prior investments and is growing its capital base. And a remarkable 116% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Genuine Parts can keep these trends up, it could have a bright future ahead.

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

While Genuine Parts 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.