Returns On Capital Are Showing Encouraging Signs At Great Lakes Dredge & Dock (NASDAQ:GLDD)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Great Lakes Dredge & Dock, this is the formula:

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

0.089 = US$72m ÷ (US$951m - US$145m) (Based on the trailing twelve months to September 2021).

So, Great Lakes Dredge & Dock has an ROCE of 8.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.5%.

Check out our latest analysis for Great Lakes Dredge & Dock

Above you can see how the current ROCE for Great Lakes Dredge & Dock compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 8.9%. The amount of capital employed has increased too, by 23%. So we're very much inspired by what we're seeing at Great Lakes Dredge & Dock thanks to its ability to profitably reinvest capital.

One more thing to note, Great Lakes Dredge & Dock has decreased current liabilities to 15% 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 Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Great Lakes Dredge & Dock has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Great Lakes Dredge & Dock, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Great Lakes Dredge & Dock isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.