To find multi-bagger stock, what are the underlying trends we need to look for in a business? In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we considered Holding graphic packaging (NYSE: GPK), it doesn’t appear to have ticked all of those boxes.
Understanding Return on Capital Employed (ROCE)
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. Analysts use this formula to calculate it for Graphic Packaging Holding:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.085 = US $ 546 million ÷ (US $ 7.8 billion – US $ 1.5 billion) (Based on the last twelve months up to June 2021).
So, Graphic Packaging Holding has a ROCE of 8.5%. In absolute terms, this is a low return, but it sits around the packaging industry average of 10%.
Check out our latest review for Graphic Packaging Holding
Above you can see how Graphic Packaging Holding’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Graphic Packaging Holding.
The ROCE trend
When we looked at the ROCE trend at Graphic Packaging Holding, we didn’t gain much trust. Over the past five years, return on capital has declined to 8.5% from 11% five years ago. Meanwhile, the company is using more capital, but it hasn’t changed much in terms of sales over the past 12 months, so it might reflect longer-term investments. It’s worth keeping an eye on the company’s profits from now on to see if those investments end up contributing to the bottom line.
Putting all of this together, although we are somewhat encouraged by Graphic Packaging Holding’s reinvestment in its own business, we are aware that the returns are diminishing. Although the market should expect these trends to improve as the stock has gained 54% over the past five years. Ultimately, if the underlying trends persist, we won’t be holding our breath that this is multi-bagging in the future.
If you are interested in further researching Graphic Packaging Holding, you may be interested in knowing the 4 warning signs that our analysis found.
Although Graphic Packaging Holding does not generate the highest return, check out this free list of companies that generate high returns on equity with strong balance sheets.
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