Sturm Ruger (NYSE:RGR) Looks To Prolong Its Impressive Returns

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Sturm Ruger (NYSE:RGR) looks attractive right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Sturm Ruger, this is the formula:

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

0.50 = US$190m ÷ (US$446m - US$66m) (Based on the trailing twelve months to April 2022).

So, Sturm Ruger has an ROCE of 50%. In absolute terms that's a great return and it's even better than the Leisure industry average of 22%.

View our latest analysis for Sturm Ruger

roce

In the above chart we have measured Sturm Ruger'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 Sturm Ruger here for free.

The Trend Of ROCE

In terms of Sturm Ruger's history of ROCE, it's quite impressive. The company has consistently earned 50% for the last five years, and the capital employed within the business has risen 68% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Sturm Ruger can keep this up, we'd be very optimistic about its future.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 15% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line On Sturm Ruger's ROCE

Sturm Ruger has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. In light of this, the stock has only gained 23% over the last five years for shareholders who have owned the stock in this period. So to determine if Sturm Ruger is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

One more thing to note, we've identified 2 warning signs with Sturm Ruger and understanding these should be part of your investment process.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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

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.