Rocky Mountain Liquor (CVE:RUM) Is Doing The Right Things To Multiply Its Share Price

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Rocky Mountain Liquor (CVE:RUM) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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)

0.073 = CA$1.5m ÷ (CA$27m - CA$6.3m) (Based on the trailing twelve months to June 2022).

Thus, Rocky Mountain Liquor has an ROCE of 7.3%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 11%.

View our latest analysis for Rocky Mountain Liquor

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 The Trend Of ROCE Can Tell Us

Rocky Mountain Liquor has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 7.3% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Rocky Mountain Liquor is utilizing 168% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 24%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

In summary, it's great to see that Rocky Mountain Liquor has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 45% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

One final note, you should learn about the 4 warning signs we've spotted with Rocky Mountain Liquor (including 3 which make us uncomfortable) .

While Rocky Mountain Liquor isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.