Rocky Mountain Liquor (CVE:RUM) Might Have The Makings Of A Multi-Bagger

Simply Wall St
·3 min read

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. So on that note, Rocky Mountain Liquor (CVE:RUM) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Rocky Mountain Liquor is:

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

0.097 = CA$2.0m ÷ (CA$26m - CA$5.2m) (Based on the trailing twelve months to September 2021).

So, Rocky Mountain Liquor has an ROCE of 9.7%. On its own, that's a low figure but it's around the 11% average generated by the Consumer Retailing industry.

Check out our latest analysis for Rocky Mountain Liquor

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Historical performance is a great place to start when researching a stock so above you can see the gauge for Rocky Mountain Liquor's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Rocky Mountain Liquor, check out these free graphs here.

What Does the ROCE Trend For Rocky Mountain Liquor Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 9.7%. Basically the business is earning more per dollar of capital invested and in addition to that, 59% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 20%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On Rocky Mountain Liquor's ROCE

To sum it up, Rocky Mountain Liquor has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Astute investors may have an opportunity here because the stock has declined 50% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing, we've spotted 2 warning signs facing Rocky Mountain Liquor that you might find interesting.

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.