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

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. 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 looked at Rocky Mountain Liquor (CVE:RUM) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Rocky Mountain Liquor:

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

0.059 = CA$1.2m ÷ (CA$24m - CA$4.0m) (Based on the trailing twelve months to September 2023).

Thus, Rocky Mountain Liquor has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 12%.

See 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're interested in investigating Rocky Mountain Liquor's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Rocky Mountain Liquor's ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 5.9%. The amount of capital employed has increased too, by 221%. 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, Rocky Mountain Liquor has decreased current liabilities to 16% 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, Rocky Mountain Liquor has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 58% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we found 3 warning signs for Rocky Mountain Liquor (2 are significant) you should be aware of.

While Rocky Mountain Liquor may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.