Finding a business with substantial growth potential isn’t easy, but it’s achievable by examining a few key financial metrics. Firstly, it’s essential to see an increasing return on capital employed (ROCE) and, secondly, an expanding capital employed base. This indicates a company that continually reinvests its earnings back into the business to generate higher returns. With that in mind, we’ve noticed promising trends at Rocky Mountain Liquor (CVE:RUM), so let’s delve deeper.

For those unfamiliar, ROCE measures a company’s yearly pre-tax profit (its return) relative to the capital employed in the business. Here’s the formula to calculate this metric for Rocky Mountain Liquor:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.057 = CA$1.1m ÷ (CA$24m – CA$4.8m) (Based on the trailing twelve months to March 2024).

Therefore, Rocky Mountain Liquor has an ROCE of 5.7%. 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

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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.

Rocky Mountain Liquor’s ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 114% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company’s efficiencies. On that front, things are looking good so it’s worth exploring what management has said about growth plans going forward.

On a related note, the company’s ratio of current liabilities to total assets has decreased to 20%, which basically reduces its funding from the likes of short-term creditors or suppliers. Therefore, we can rest assured that the growth in ROCE is a result of the business’ fundamental improvements, rather than a cooking class featuring this company’s books.

In summary, we’re delighted to see that Rocky Mountain Liquor has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 31% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

If you’d like to know about the risks facing Rocky Mountain Liquor, we’ve discovered 2 warning signs that you should be aware of.

While Rocky Mountain Liquor isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com