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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at General Dynamics (NYSE:GD) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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%. On its own, that's a standard return, however it's much better than the 9.6% generated by the Aerospace & Defense industry.
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 to see what analysts are forecasting going forward, you should check out our free analyst report for General Dynamics .
The Trend Of ROCE
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.
What We Can Learn From 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 64% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
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.