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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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in BRP's (TSE:DOO) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for BRP:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = CA$735m ÷ (CA$4.9b - CA$2.2b) (Based on the trailing twelve months to January 2021).
Thus, BRP has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Leisure industry average of 19%.
See our latest analysis for BRP
In the above chart we have measured BRP's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering BRP here for free.
What Does the ROCE Trend For BRP Tell Us?
We like the trends that we're seeing from BRP. The data shows that returns on capital have increased substantially over the last five years to 27%. 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 78%. So we're very much inspired by what we're seeing at BRP thanks to its ability to profitably reinvest capital.
Another thing to note, BRP has a high ratio of current liabilities to total assets of 45%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line
To sum it up, BRP has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 486% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if BRP can keep these trends up, it could have a bright future ahead.