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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after briefly looking over the numbers, we don't think General Dynamics (NYSE:GD) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for General Dynamics:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$4.5b ÷ (US$57b - US$20b) (Based on the trailing twelve months to September 2024).
So, General Dynamics has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Aerospace & Defense industry average of 9.6% it's much better.
View our latest analysis for General Dynamics
In the above chart we have measured General Dynamics' 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 General Dynamics for free.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at General Dynamics, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 12% from 15% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On General Dynamics' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that General Dynamics is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 75% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
General Dynamics could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for GD on our platform quite valuable.