To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 MarineMax (NYSE:HZO) and its trend of ROCE, we really liked 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. Analysts use this formula to calculate it for MarineMax:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = US$125m ÷ (US$965m - US$321m) (Based on the trailing twelve months to December 2020).
So, MarineMax has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Specialty Retail industry average of 13% it's much better.
Above you can see how the current ROCE for MarineMax 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 MarineMax.
How Are Returns Trending?
Investors would be pleased with what's happening at MarineMax. Over the last five years, returns on capital employed have risen substantially to 19%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 125%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
One more thing to note, MarineMax has decreased current liabilities to 33% 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 Bottom Line
In summary, it's great to see that MarineMax 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. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Like most companies, MarineMax does come with some risks, and we've found 4 warning signs that you should be aware of.
While MarineMax 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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