Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 General Motors (NYSE:GM), it didn’t seem to tick all of these boxes.
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. The formula for this calculation on General Motors is:
Return on Capital Employed=Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.064=US$12b ÷ (US$289b – US$95b) (Based on the trailing twelve months to September 2024).
Therefore, General Motors has an ROCE of 6.4%. On its own, that’s a low figure but it’s around the 7.0% average generated by the Auto industry.
See our latest analysis for General Motors
NYSE:GM Return on Capital Employed December 8th 2024 In the above chart we have measured General Motors’ 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 analyst report for General Motors .
There are better returns on capital out there than what we’re seeing at General Motors. The company has consistently earned 6.4% for the last five years, and the capital employed within the business has risen 32% in that time. This poor ROCE doesn’t inspire confidence right now, and with the increase in capital employed, it’s evident that the business isn’t deploying the funds into high return investments.
In conclusion, General Motors has been investing more capital into the business, but returns on that capital haven’t increased. Although the market must be expecting these trends to improve because the stock has gained 56% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn’t high.
One final note, you should learn about the 3 warning signs we’ve spotted with General Motors (including 2 which are concerning) .
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.
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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.