July 15, 2024

Returns Are Gaining Momentum At Penske Automotive Group (NYSE:PAG)

4 min read
Returns Are Gaining Momentum At Penske Automotive Group (NYSE:PAG)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Penske Automotive Group (NYSE:PAG) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Penske Automotive Group, this is the formula:

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

0.16 = US$1.5b ÷ (US$14b – US$4.2b) (Based on the trailing twelve months to June 2022).

Therefore, Penske Automotive Group has an ROCE of 16{5be0972a10a00bb621c1a18de1a801d58662e556d02921cebb422beac5e5b2fe}. That’s a relatively normal return on capital, and it’s around the 17{5be0972a10a00bb621c1a18de1a801d58662e556d02921cebb422beac5e5b2fe} generated by the Specialty Retail industry.

Returns Are Gaining Momentum At Penske Automotive Group (NYSE:PAG)
NYSE:PAG Return on Capital Employed August 29th 2022

In the above chart we have measured Penske Automotive Group’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Penske Automotive Group.

What The Trend Of ROCE Can Tell Us

We like the trends that we’re seeing from Penske Automotive Group. Over the last five years, returns on capital employed have risen substantially to 16{5be0972a10a00bb621c1a18de1a801d58662e556d02921cebb422beac5e5b2fe}. The amount of capital employed has increased too, by 80{5be0972a10a00bb621c1a18de1a801d58662e556d02921cebb422beac5e5b2fe}. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.

One more thing to note, Penske Automotive Group has decreased current liabilities to 31{5be0972a10a00bb621c1a18de1a801d58662e556d02921cebb422beac5e5b2fe} of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business’ underlying economics, which is great to see.

The Bottom Line

To sum it up, Penske Automotive Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 218{5be0972a10a00bb621c1a18de1a801d58662e556d02921cebb422beac5e5b2fe} total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it’s worth researching the company further to see if these trends are likely to persist.

If you want to know some of the risks facing Penske Automotive Group we’ve found 4 warning signs (1 can’t be ignored!) that you should be aware of before investing here.

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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