What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Speaking of which, we noticed some great changes in General Motors’ (NYSE:GM) returns on capital, so let’s have a look.
Understanding 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. Analysts use this formula to calculate it for General Motors:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.069 = US$13b ÷ (US$280b – US$96b) (Based on the trailing twelve months to December 2024).
So, General Motors has an ROCE of 6.9%. On its own, that’s a low figure but it’s around the 6.1% average generated by the Auto industry.
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 .
The Trend Of ROCE
We’re glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 6.9%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has increased too, by 28%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
What We Can Learn From General Motors’ ROCE
All in all, it’s terrific to see that General Motors is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it’s worth looking further into this stock because if General Motors can keep these trends up, it could have a bright future ahead.
General Motors does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.
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.