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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Latham Group (NASDAQ:SWIM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 Latham Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = US$23m ÷ (US$909m - US$124m) (Based on the trailing twelve months to July 2022).
Therefore, Latham Group has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Leisure industry average of 21%.
See our latest analysis for Latham Group
Above you can see how the current ROCE for Latham Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Latham Group here for free.
The Trend Of ROCE
In terms of Latham Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 6.3% over the last two years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Latham Group's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Latham Group is reinvesting for growth and has higher sales as a result. But since the stock has dived 74% in the last year, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.
On a separate note, we've found 1 warning sign for Latham Group you'll probably want to know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.