Shareholders Would Enjoy A Repeat Of Lululemon Athletica's (NASDAQ:LULU) Recent Growth In 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Lululemon Athletica's (NASDAQ:LULU) look very promising so lets take a look.

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. To calculate this metric for Lululemon Athletica, this is the formula:

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

0.43 = US$1.9b ÷ (US$5.6b - US$1.3b) (Based on the trailing twelve months to April 2023).

Therefore, Lululemon Athletica has an ROCE of 43%. In absolute terms that's a great return and it's even better than the Luxury industry average of 14%.

Check out our latest analysis for Lululemon Athletica

In the above chart we have measured Lululemon Athletica'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 report on analyst forecasts for the company.

So How Is Lululemon Athletica's ROCE Trending?

The trends we've noticed at Lululemon Athletica are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 43%. The amount of capital employed has increased too, by 148%. So we're very much inspired by what we're seeing at Lululemon Athletica thanks to its ability to profitably reinvest capital.

The Bottom Line

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 Lululemon Athletica has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, Lululemon Athletica does come with some risks, and we've found 1 warning sign that you should be aware of.

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.