Genuine Parts (NYSE:GPC) Is Experiencing Growth In Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Genuine Parts (NYSE:GPC) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Genuine Parts:

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

0.19 = US$1.7b ÷ (US$17b - US$7.9b) (Based on the trailing twelve months to March 2023).

So, Genuine Parts has an ROCE of 19%. That's a relatively normal return on capital, and it's around the 17% generated by the Retail Distributors industry.

Check out 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 to see what analysts are forecasting going forward, you should check out our free report for Genuine Parts.

SWOT Analysis for Genuine Parts

So How Is Genuine Parts' ROCE Trending?

We like the trends that we're seeing from Genuine Parts. Over the last five years, returns on capital employed have risen substantially to 19%. The amount of capital employed has increased too, by 28%. So we're very much inspired by what we're seeing at Genuine Parts thanks to its ability to profitably reinvest capital.

On a side note, Genuine Parts' current liabilities are still rather high at 47% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Genuine Parts has. Since the stock has returned a staggering 102% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 1 warning sign with Genuine Parts and understanding it should be part of your investment process.

While Genuine Parts isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.