What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Great Lakes Dredge & Dock (NASDAQ:GLDD) and its 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. The formula for this calculation on Great Lakes Dredge & Dock is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.097 = US$77m ÷ (US$960m - US$169m) (Based on the trailing twelve months to March 2021).
Therefore, Great Lakes Dredge & Dock has an ROCE of 9.7%. On its own, that's a low figure but it's around the 9.5% average generated by the Construction industry.
In the above chart we have measured Great Lakes Dredge & Dock'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 Great Lakes Dredge & Dock.
The Trend Of ROCE
Great Lakes Dredge & Dock is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 172% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line On Great Lakes Dredge & Dock's ROCE
To sum it up, Great Lakes Dredge & Dock is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 218% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Great Lakes Dredge & Dock can keep these trends up, it could have a bright future ahead.
If you want to know some of the risks facing Great Lakes Dredge & Dock we've found 3 warning signs (1 is concerning!) that you should be aware of before investing here.
While Great Lakes Dredge & Dock 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. 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.
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