Why You Should Care About Pool's (NASDAQ:POOL) Strong Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Pool's (NASDAQ:POOL) ROCE trend, we were very happy with what we saw.

Understanding Return On Capital Employed (ROCE)

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 Pool is:

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%. In absolute terms that's a great return and it's even better than the Retail Distributors industry average of 18%.

See our latest analysis for Pool

Above you can see how the current ROCE for Pool compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Pool.

What The Trend Of ROCE Can Tell Us

In terms of Pool's history of ROCE, it's quite impressive. The company has consistently earned 35% for the last five years, and the capital employed within the business has risen 261% in that time. 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.

The Bottom Line

Pool has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And long term investors would be thrilled with the 226% return they've received 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.

One more thing to note, we've identified 3 warning signs with Pool and understanding these should be part of your investment process.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.