Capital Allocation Trends At Olaplex Holdings (NASDAQ:OLPX) Aren't Ideal

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Olaplex Holdings (NASDAQ:OLPX), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Olaplex Holdings is:

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

0.058 = US$98m ÷ (US$1.8b - US$71m) (Based on the trailing twelve months to June 2024).

Therefore, Olaplex Holdings has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 16%.

View our latest analysis for Olaplex Holdings

Above you can see how the current ROCE for Olaplex Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Olaplex Holdings .

So How Is Olaplex Holdings' ROCE Trending?

When we looked at the ROCE trend at Olaplex Holdings, we didn't gain much confidence. Around four years ago the returns on capital were 16%, but since then they've fallen to 5.8%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

In summary, we're somewhat concerned by Olaplex Holdings' diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last year have experienced a 13% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a separate note, we've found 2 warning signs for Olaplex Holdings you'll probably want to know about.

While Olaplex Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.