Here's What's Concerning About Olaplex Holdings' (NASDAQ:OLPX) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Olaplex Holdings (NASDAQ:OLPX) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. Analysts use this formula to calculate it for Olaplex Holdings:

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

0.18 = US$295m ÷ (US$1.7b - US$58m) (Based on the trailing twelve months to March 2023).

So, Olaplex Holdings has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Personal Products industry average of 13% it's much better.

Check out 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, you can check out the forecasts from the analysts covering Olaplex Holdings here for free.

SWOT Analysis 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. To be more specific, ROCE has fallen from 30% over the last three years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Olaplex Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Olaplex Holdings' reinvestment in its own business, we're aware that returns are shrinking. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 78% in the last year. Therefore based on the analysis done in this article, we don't think Olaplex Holdings has the makings of a multi-bagger.

Olaplex Holdings could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.