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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Speaking of which, we noticed some great changes in Great Lakes Dredge & Dock's (NASDAQ:GLDD) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Great Lakes Dredge & Dock is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$108m ÷ (US$948m - US$196m) (Based on the trailing twelve months to June 2020).
Thus, Great Lakes Dredge & Dock has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 10% it's much better.
In the above chart we have measured Great Lakes Dredge & Dock's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Great Lakes Dredge & Dock.
How Are Returns Trending?
Great Lakes Dredge & Dock has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 641% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line
To sum it up, Great Lakes Dredge & Dock is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 181% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Great Lakes Dredge & Dock can keep these trends up, it could have a bright future ahead.
Great Lakes Dredge & Dock does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is concerning...
While Great Lakes Dredge & Dock may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
This article by Simply Wall St is general in nature. 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.
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