Will the Promising Trends At GrowGeneration (NASDAQ:GRWG) Continue?

Will the Promising Trends At GrowGeneration (NASDAQ:GRWG) Continue?

View photos

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. So on that note, GrowGeneration (NASDAQ:GRWG) looks quite promising in regards to its trends of return on capital.” data-reactid=”28″>What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. So on that note, GrowGeneration (NASDAQ:GRWG) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on GrowGeneration is:

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)” data-reactid=”31″>Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="0.019 = US$1.3m ÷ (US$88m – US$19m) (Based on the trailing twelve months to June 2020).” data-reactid=”36″>0.019 = US$1.3m ÷ (US$88m – US$19m) (Based on the trailing twelve months to June 2020).

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Therefore, GrowGeneration has an ROCE of 1.9%. In absolute terms, that’s a low return and it also under-performs the Specialty Retail industry average of 9.6%.” data-reactid=”37″>Therefore, GrowGeneration has an ROCE of 1.9%. In absolute terms, that’s a low return and it also under-performs the Specialty Retail industry average of 9.6%.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content=" Check out our latest analysis for GrowGeneration ” data-reactid=”38″> Check out our latest analysis for GrowGeneration

roceroce

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="In the above chart we have measured GrowGeneration's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for GrowGeneration.” data-reactid=”51″>In the above chart we have measured GrowGeneration’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like to see what analysts are forecasting going forward, you should check out our free report for GrowGeneration.

What The Trend Of ROCE Can Tell Us

We’re delighted to see that GrowGeneration is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it’s now earning 1.9% on its capital. In addition to that, GrowGeneration is employing 4,974% more capital than previously which is expected of a company that’s trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Our Take On GrowGeneration’s ROCE

In summary, it’s great to see that GrowGeneration has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 835% to shareholders over the last three years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="If you want to continue researching GrowGeneration, you might be interested to know about the 2 warning signs that our analysis has discovered.” data-reactid=”56″>If you want to continue researching GrowGeneration, you might be interested to know about the 2 warning signs that our analysis has discovered.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="While GrowGeneration may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.” data-reactid=”57″>While GrowGeneration may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="This article by Simply Wall St is general in nature. 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.” data-reactid=”58″>This article by Simply Wall St is general in nature. 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.

Leave a Reply

Your email address will not be published. Required fields are marked *