Genuine Parts (NYSE:GPC) Looks To Prolong Its Impressive Returns

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Ergo, when we looked at the ROCE trends at Genuine Parts (NYSE:GPC), we liked what we saw.

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

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 Genuine Parts, this is the formula:

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

0.20 = US$1.8b ÷ (US$16b - US$7.5b) (Based on the trailing twelve months to September 2022).

Thus, Genuine Parts has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Retail Distributors industry average of 15%.

Check out the opportunities and risks within the US Retail Distributors industry.

In the above chart we have measured Genuine Parts' 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.

So How Is Genuine Parts' ROCE Trending?

It's hard not to be impressed by Genuine Parts' returns on capital. The company has employed 88% more capital in the last five years, and the returns on that capital have remained stable at 20%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Genuine Parts can keep this up, we'd be very optimistic about its future.

On a separate but related note, it's important to know that Genuine Parts has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Genuine Parts' ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And long term investors would be thrilled with the 132% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

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

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.