If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, we've noticed some promising trends at Genuine Parts (NYSE:GPC) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Genuine Parts:

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

0.18 = US$1.8b ÷ (US$19b - US$8.8b) (Based on the trailing twelve months to June 2024).

So, Genuine Parts has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Retail Distributors industry average of 11% it's much better.

Above you can see how the current ROCE for Genuine Parts compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Genuine Parts .

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Genuine Parts are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 18%. The amount of capital employed has increased too, by 24%. So we're very much inspired by what we're seeing at Genuine Parts thanks to its ability to profitably reinvest capital.

On a side note, Genuine Parts' current liabilities are still rather high at 46% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Genuine Parts' ROCE

To sum it up, Genuine Parts has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 70% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Genuine Parts does have some risks though, and we've spotted 1 warning sign for Genuine Parts that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.