If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Great Lakes Dredge & Dock (NASDAQ:GLDD) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Great Lakes Dredge & Dock, this is the formula:

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

0.055 = US$51m ÷ (US$1.1b - US$168m) (Based on the trailing twelve months to March 2024).

So, Great Lakes Dredge & Dock has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 11%.

In the above chart we have measured Great Lakes Dredge & Dock'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 Great Lakes Dredge & Dock for free.

What Does the ROCE Trend For Great Lakes Dredge & Dock Tell Us?

When we looked at the ROCE trend at Great Lakes Dredge & Dock, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.5% from 15% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Great Lakes Dredge & Dock's ROCE

Bringing it all together, while we're somewhat encouraged by Great Lakes Dredge & Dock's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 15% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Great Lakes Dredge & Dock has the makings of a multi-bagger.

Like most companies, Great Lakes Dredge & Dock does come with some risks, and we've found 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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