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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at General Dynamics (NYSE:GD) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is 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. To calculate this metric for General Dynamics, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$4.8b ÷ (US$56b - US$18b) (Based on the trailing twelve months to December 2024).
Therefore, General Dynamics has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Aerospace & Defense industry average of 9.9% it's much better.
View our latest analysis for General Dynamics
Above you can see how the current ROCE for General Dynamics 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 General Dynamics for free.
So How Is General Dynamics' ROCE Trending?
There hasn't been much to report for General Dynamics' returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect General Dynamics to be a multi-bagger going forward. This probably explains why General Dynamics is paying out 37% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.
Our Take On General Dynamics' ROCE
We can conclude that in regards to General Dynamics' returns on capital employed and the trends, there isn't much change to report on. Yet to long term shareholders the stock has gifted them an incredible 125% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.