There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we would like to see a company investing more capital into its business, and ideally increasing returns on that capital as well. Essentially, this means that the company has profitable initiatives that it can continue to reinvest in, a feature of a compounding machine. That being said, from the first look Lulu’s Fashion Lounge Holdings (NASDAQ:LVLU) we’re not jumping out of our chairs as earnings are trending, but let’s take a deeper look.
Return on Capital Employed (ROCE): What is it?
Just to clarify if you’re not sure, ROCE is a metric for evaluating how much pre-tax income (as a percentage) a company earns on the capital invested in its business. Analysts use this formula to calculate for Lulu’s Fashion Lounge Holdings:
Return on capital employed = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.092 = $10M ÷ ($180M – $70M) (Based on last twelve months to October 2022).
Therefore, Lulu’s Fashion Lounge Holdings has a ROCE of 9.2%. That’s a low number in itself, but it hovers around the 12% average generated by the online retail industry.
Check out our latest analysis of Lulu’s Fashion Lounge Holdings
Above you can see how the current ROCE for Lulu’s Fashion Lounge Holdings compares to past returns on capital, but you can only tell so much from the past. If you would like to see what the analysts are predicting for the future, you should check out ours free, release report to Lulu’s Fashion Lounge Holdings.
So what are the trends of ROCE Lulu’s Fashion Lounge Holdings?
At first glance, the ROCE trend in Lulu’s Fashion Lounge Holdings does not inspire confidence. To be more specific, ROCE has fallen from 34% over the past four years. Although given the increase in revenue as well as the volume of assets used in the business, this could indicate that the company is investing in growth, and the additional capital led to a short-term reduction in ROCE. If these investments prove successful, it could bode very well for the stock’s long-term performance.
In short, despite lower near-term earnings, we’re encouraged to see Lulu’s Fashion Lounge Holdings reinvest in growth and have higher sales as a result. But with shares down 76% over the past year, there may be other factors weighing on the business’s outlook. Therefore, we recommend that you explore the stock further to learn more about the business.
We noticed one more thing 2 warning signs facing Lulu’s Fashion Lounge Holdings that you may be interested in.
For those who like to invest solid companies, look at this free, release list of companies with solid balance sheets and high return on equity.
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This article from 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 as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our goal is to bring you long-term targeted analysis based on basic data. Please note that our analysis may not take into account recent company announcements or price-sensitive qualitative material. Simply Wall St has no position in any of the listed stocks.
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