Stock Analysis

Why You Should Care About BRP's (TSE:DOO) Strong Returns On Capital

TSX:DOO
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over BRP's (TSE:DOO) trend of ROCE, we really liked what we saw.

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

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. Analysts use this formula to calculate it for BRP:

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

0.36 = CA$1.5b ÷ (CA$6.7b - CA$2.7b) (Based on the trailing twelve months to April 2023).

So, BRP has an ROCE of 36%. That's a fantastic return and not only that, it outpaces the average of 19% earned by companies in a similar industry.

Check out our latest analysis for BRP

roce
TSX:DOO Return on Capital Employed June 19th 2023

Above you can see how the current ROCE for BRP compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for BRP.

SWOT Analysis for BRP

Strength
  • Earnings growth over the past year exceeded the industry.
  • Debt is well covered by earnings and cashflows.
Weakness
  • Dividend is low compared to the top 25% of dividend payers in the Leisure market.
Opportunity
  • Annual revenue is forecast to grow faster than the Canadian market.
  • Good value based on P/E ratio and estimated fair value.
Threat
  • Annual earnings are forecast to grow slower than the Canadian market.

So How Is BRP's ROCE Trending?

In terms of BRP's history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 36% and the business has deployed 256% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If BRP can keep this up, we'd be very optimistic about its future.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 40% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And the stock has followed suit returning a meaningful 85% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you want to continue researching BRP, you might be interested to know about the 1 warning sign that our analysis has discovered.

BRP is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

Valuation is complex, but we're helping make it simple.

Find out whether BRP is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.