To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. In light of that, when we looked at Great Lakes Dredge & Dock (NASDAQ:GLDD) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Great Lakes Dredge & Dock:

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

0.086 = US$83m ÷ (US$1.1b - US$178m) (Based on the trailing twelve months to September 2024).

Thus, Great Lakes Dredge & Dock has an ROCE of 8.6%. Ultimately, that's a low return and it under-performs the Construction industry average of 13%.

View our latest analysis for Great Lakes Dredge & Dock

Above you can see how the current ROCE for Great Lakes Dredge & Dock compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Great Lakes Dredge & Dock .

So How Is Great Lakes Dredge & Dock's ROCE Trending?

When we looked at the ROCE trend at Great Lakes Dredge & Dock, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 8.6%. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Great Lakes Dredge & Dock. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Great Lakes Dredge & Dock does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Great Lakes Dredge & Dock 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.