Here's What Pool's (NASDAQ:POOL) Strong Returns On Capital Mean

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. 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. Ergo, when we looked at the ROCE trends at Pool (NASDAQ:POOL), we 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. To calculate this metric for Pool, this is the formula:

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

0.35 = US$1.0b ÷ (US$3.7b - US$737m) (Based on the trailing twelve months to September 2022).

Therefore, Pool has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.

Check out the opportunities and risks within the US Retail Distributors industry.

In the above chart we have measured Pool'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 Pool here for free.

What Can We Tell From Pool's ROCE Trend?

We'd be pretty happy with returns on capital like Pool. The company has employed 262% more capital in the last five years, and the returns on that capital have remained stable at 35%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Pool can keep this up, we'd be very optimistic about its future.

What We Can Learn From Pool's ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 156% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know about the risks facing Pool, we've discovered 3 warning signs that you should be aware of.

Pool 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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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.