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If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Rocky Mountain Liquor (CVE:RUM), it didn't seem to tick all of these boxes.
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. To calculate this metric for Rocky Mountain Liquor, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.04 = CA$727k ÷ (CA$24m - CA$5.6m) (Based on the trailing twelve months to June 2024).
Thus, Rocky Mountain Liquor has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 12%.
View our latest analysis for Rocky Mountain Liquor
Historical performance is a great place to start when researching a stock so above you can see the gauge for Rocky Mountain Liquor's ROCE against it's prior returns. If you'd like to look at how Rocky Mountain Liquor has performed in the past in other metrics, you can view this free graph of Rocky Mountain Liquor's past earnings, revenue and cash flow.
What Does the ROCE Trend For Rocky Mountain Liquor Tell Us?
Things have been pretty stable at Rocky Mountain Liquor, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Rocky Mountain Liquor doesn't end up being a multi-bagger in a few years time.
On a side note, Rocky Mountain Liquor has done well to reduce current liabilities to 24% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.
The Key Takeaway
In a nutshell, Rocky Mountain Liquor has been trudging along with the same returns from the same amount of capital over the last five years. Yet to long term shareholders the stock has gifted them an incredible 150% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.