If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s 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. So when we looked at e.l.f. Beauty (NYSE:ELF) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
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 e.l.f. Beauty, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.16 = US$143m ÷ (US$1.2b – US$300m) (Based on the trailing twelve months to June 2024).
Therefore, e.l.f. Beauty has an ROCE of 16%. That’s a pretty standard return and it’s in line with the industry average of 16%.
See our latest analysis for e.l.f. Beauty
In the above chart we have measured e.l.f. Beauty’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free analyst report for e.l.f. Beauty .
What The Trend Of ROCE Can Tell Us
Investors would be pleased with what’s happening at e.l.f. Beauty. The data shows that returns on capital have increased substantially over the last five years to 16%. The amount of capital employed has increased too, by 132%. So we’re very much inspired by what we’re seeing at e.l.f. Beauty thanks to its ability to profitably reinvest capital.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 25% of its operations, which isn’t ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
The Key Takeaway
To sum it up, e.l.f. Beauty has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 947% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it’s worth looking further into this stock because if e.l.f. Beauty can keep these trends up, it could have a bright future ahead.
On a separate note, we’ve found 2 warning signs for e.l.f. Beauty you’ll probably want to know about.
While e.l.f. Beauty 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.
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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.
