Olaplex Holdings (NASDAQ:OLPX) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Olaplex Holdings (NASDAQ:OLPX), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.053 = US$90m ÷ (US$1.8b - US$57m) (Based on the trailing twelve months to September 2024).

So, Olaplex Holdings has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 14%.

See our latest analysis for Olaplex Holdings

In the above chart we have measured Olaplex Holdings' 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 analyst report for Olaplex Holdings .

What Does the ROCE Trend For Olaplex Holdings Tell Us?

In terms of Olaplex Holdings' historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 5.3% from 11% four years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

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. Moreover, since the stock has crumbled 93% over the last three years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Olaplex Holdings has the makings of a multi-bagger.

If you'd like to know more about Olaplex Holdings, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

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.