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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating Latham Group (NASDAQ:SWIM), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)
0.029 = US$22m ÷ (US$853m - US$89m) (Based on the trailing twelve months to September 2024).
Therefore, Latham Group has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Leisure industry average of 11%.
Check out 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Latham Group .
What The Trend Of ROCE Can Tell Us
In terms of Latham Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 6.8% over the last four years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
The Key Takeaway
From the above analysis, we find it rather worrisome that returns on capital and sales for Latham Group have fallen, meanwhile the business is employing more capital than it was four years ago. This could explain why the stock has sunk a total of 71% in the last three years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
Latham Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...
While Latham Group 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.
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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.