If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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 the ROCE trend of OneWater Marine (NASDAQ:ONEW) we really liked what we saw.
Understanding 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 OneWater Marine:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.37 = US$130m ÷ (US$633m - US$286m) (Based on the trailing twelve months to March 2021).
Thus, OneWater Marine has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 14%.
In the above chart we have measured OneWater Marine's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering OneWater Marine here for free.
What The Trend Of ROCE Can Tell Us
OneWater Marine is displaying some positive trends. The numbers show that in the last three years, the returns generated on capital employed have grown considerably to 37%. Basically the business is earning more per dollar of capital invested and in addition to that, 103% more capital is being employed now too. So we're very much inspired by what we're seeing at OneWater Marine thanks to its ability to profitably reinvest capital.
On a side note, OneWater Marine's current liabilities are still rather high at 45% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On OneWater Marine's ROCE
In summary, it's great to see that OneWater Marine can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 398% to shareholders over the last year, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if OneWater Marine can keep these trends up, it could have a bright future ahead.
OneWater Marine does have some risks though, and we've spotted 3 warning signs for OneWater Marine that you might be interested in.
OneWater Marine is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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