We Like These Underlying Return On Capital Trends At Rocky Mountain Liquor (CVE:RUM)

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Rocky Mountain Liquor (CVE:RUM) so let's look a bit deeper.

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

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. The formula for this calculation on Rocky Mountain Liquor is:

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

0.061 = CA$1.2m ÷ (CA$24m - CA$4.8m) (Based on the trailing twelve months to March 2023).

So, Rocky Mountain Liquor has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 12%.

See our latest analysis for Rocky Mountain Liquor

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Rocky Mountain Liquor's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The fact that Rocky Mountain Liquor is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 6.1% which is a sight for sore eyes. In addition to that, Rocky Mountain Liquor is employing 194% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 20%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

Long story short, we're delighted to see that Rocky Mountain Liquor's reinvestment activities have paid off and the company is now profitable. Although the company may be facing some issues elsewhere since the stock has plunged 71% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

If you'd like to know more about Rocky Mountain Liquor, we've spotted 4 warning signs, and 3 of them don't sit too well with us.

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.