Genuine Parts (NYSE:GPC) May Have Issues Allocating Its Capital
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Although, when we looked at Genuine Parts (NYSE:GPC), it didn't seem to tick all of these boxes.
What is 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. 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)
0.13 = US$1.0b ÷ (US$13b - US$5.9b) (Based on the trailing twelve months to December 2020).
So, Genuine Parts has an ROCE of 13%. In isolation, that's a pretty standard return but against the Retail Distributors industry average of 26%, it's not as good.
View our latest analysis for Genuine Parts
Above you can see how the current ROCE for Genuine Parts compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Genuine Parts here for free.
How Are Returns Trending?
In terms of Genuine Parts' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 27% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.
On a side note, Genuine Parts' current liabilities are still rather high at 44% 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.
In Conclusion...
To conclude, we've found that Genuine Parts is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 38% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you'd like to know about the risks facing Genuine Parts, we've discovered 4 warning signs that you should be aware of.
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.
This article by Simply Wall St is general in nature. 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.
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