Capital investment trends at Graco (NYSE:GGG) appear solid

If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should watch out for. A common approach is to try to find a company with Return on capital employed (ROCE) which is increasing, in line with growth amount capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. With this in mind, the ROCE of Graco (NYSE:GGG) looks attractive right now, so let’s see what the yield trend can tell us.

What is return on capital employed (ROCE)?

For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. The formula for this calculation on Graco is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.27 = $537 million ÷ ($2.4 billion – $424 million) (Based on the last twelve months to July 2022).

Thereby, Graco has a ROCE of 27%. In absolute terms, that’s excellent performance and even better than the machinery industry average of 10%.

Our analysis indicates that GGG is potentially undervalued!

NYSE: GGG Return on Capital Employed October 23, 2022

Above, you can see how Graco’s current ROCE compares to its past returns on capital, but there’s little you can say about the past. If you want to see what analysts predict for the future, you should check out our free report for Graco.

What the ROCE trend can tell us

We’d rather be happy with returns on capital like Graco. The company has employed 84% more capital over the past five years, and the return on that capital has remained stable at 27%. With such high returns, it’s great that the company can continually reinvest its money at such attractive rates of return. If these trends can continue, we wouldn’t be surprised if the company went multi-bagger.

In conclusion…

In short, we would say that Graco has the makings of a multi-bagger since it has been able to compound its capital at very profitable rates of return. So it’s no surprise that shareholders have earned a respectable 51% return if they’ve held for the past five years. So while investors seem to recognize these promising trends, we still think the stock warrants further research.

On the other side of ROCE, we have to consider valuation. That’s why we have a FREE intrinsic value estimation on our platform definitely worth checking out.

If you want to find more stocks that have generated high returns, check out this free list of stocks with strong balance sheets that also generate high returns on equity.

Valuation is complex, but we help make it simple.

Find out if Graco is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.