BRP (TSE:DOO) Could Become A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in BRP's (TSE:DOO) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for BRP, this is the formula:

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

0.47 = CA$1.1b ÷ (CA$5.2b - CA$2.9b) (Based on the trailing twelve months to April 2022).

Therefore, BRP has an ROCE of 47%. In absolute terms that's a great return and it's even better than the Leisure industry average of 22%.

See our latest analysis for BRP

In the above chart we have measured BRP'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 BRP.

The Trend Of ROCE

Investors would be pleased with what's happening at BRP. Over the last five years, returns on capital employed have risen substantially to 47%. The amount of capital employed has increased too, by 55%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 56% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

Our Take On BRP's ROCE

All in all, it's terrific to see that BRP is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 138% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

BRP does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those are a bit unpleasant...

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.