Olaplex Holdings (NASDAQ:OLPX) Is Reinvesting At Lower Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Olaplex Holdings, this is the formula:

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

0.12 = US$201m ÷ (US$1.7b - US$61m) (Based on the trailing twelve months to June 2023).

So, Olaplex Holdings has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 13% generated by the Personal Products industry.

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Olaplex Holdings doesn't inspire confidence. Over the last three years, returns on capital have decreased to 12% from 16% three years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

In summary, we're somewhat concerned by Olaplex Holdings' diminishing returns on increasing amounts of capital. This could explain why the stock has sunk a total of 79% in the last year. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Olaplex Holdings does have some risks though, and we've spotted 1 warning sign for Olaplex Holdings that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.