We Think L'Oréal (EPA:OR) Might Have The DNA Of A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at L'Oréal's (EPA:OR) look very promising so lets take a look.

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What Is 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. Analysts use this formula to calculate it for L'Oréal:

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

0.22 = €8.8b ÷ (€55b - €15b) (Based on the trailing twelve months to June 2025).

So, L'Oréal has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Personal Products industry average of 13%.

View our latest analysis for L'Oréal

In the above chart we have measured L'Oréal'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 L'Oréal for free.

What Can We Tell From L'Oréal's ROCE Trend?

L'Oréal is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 22%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 21%. So we're very much inspired by what we're seeing at L'Oréal thanks to its ability to profitably reinvest capital.

What We Can Learn From L'Oréal's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what L'Oréal has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 50% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for OR that compares the share price and estimated value.

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.

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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.