A Look Into Estée Lauder Companies' (NYSE:EL) Impressive Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ergo, when we looked at the ROCE trends at Estée Lauder Companies (NYSE:EL), we liked what we saw.

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 Estée Lauder Companies:

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

0.24 = US$3.8b ÷ (US$21b - US$5.4b) (Based on the trailing twelve months to March 2022).

So, Estée Lauder Companies has an ROCE of 24%. In absolute terms that's a very respectable return and compared to the Personal Products industry average of 20% it's pretty much on par.

View our latest analysis for Estée Lauder Companies

In the above chart we have measured Estée Lauder Companies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Estée Lauder Companies here for free.

What Can We Tell From Estée Lauder Companies' ROCE Trend?

It's hard not to be impressed by Estée Lauder Companies' returns on capital. The company has employed 86% more capital in the last five years, and the returns on that capital have remained stable at 24%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

The Bottom Line

In short, we'd argue Estée Lauder Companies has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has done incredibly well with a 188% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Estée Lauder Companies does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

Estée Lauder Companies is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.