U.S. Markets close in 1 hr 37 mins
  • S&P 500

    3,804.20
    +18.82 (+0.50%)
     
  • Dow 30

    30,954.12
    +178.69 (+0.58%)
     
  • Nasdaq

    11,054.37
    +25.63 (+0.23%)
     
  • Russell 2000

    1,713.05
    +5.06 (+0.30%)
     
  • Crude Oil

    108.66
    +2.90 (+2.74%)
     
  • Gold

    1,807.30
    0.00 (0.00%)
     
  • Silver

    19.78
    -0.57 (-2.79%)
     
  • EUR/USD

    1.0424
    -0.0059 (-0.5629%)
     
  • 10-Yr Bond

    2.8890
    -0.0830 (-2.79%)
     
  • Vix

    27.16
    -1.55 (-5.40%)
     
  • GBP/USD

    1.2080
    -0.0095 (-0.7840%)
     
  • USD/JPY

    135.3800
    -0.3480 (-0.2564%)
     
  • BTC-USD

    19,479.31
    +390.32 (+2.04%)
     
  • CMC Crypto 200

    419.51
    -0.63 (-0.15%)
     
  • FTSE 100

    7,168.65
    -0.63 (-0.01%)
     
  • Nikkei 225

    25,935.62
    -457.42 (-1.73%)
     

GATX (NYSE:GATX) Is Reinvesting At Lower Rates Of Return

  • Oops!
    Something went wrong.
    Please try again later.
·2 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at GATX (NYSE:GATX), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for GATX, this is the formula:

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

0.031 = US$303m ÷ (US$9.9b - US$194m) (Based on the trailing twelve months to March 2022).

Thus, GATX has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 14%.

Check out our latest analysis for GATX

roce
roce

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

The Trend Of ROCE

When we looked at the ROCE trend at GATX, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.1% from 4.9% five years ago. 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.

The Bottom Line On GATX's ROCE

In summary, GATX is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 72% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about GATX, we've spotted 5 warning signs, and 1 of them is a bit unpleasant.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.