The Return Trends At e.l.f. Beauty (NYSE:ELF) Look Promising

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, we've noticed some promising trends at e.l.f. Beauty (NYSE:ELF) so let's look a bit deeper.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on e.l.f. Beauty is:

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

0.18 = US$144m ÷ (US$1.1b - US$303m) (Based on the trailing twelve months to December 2023).

Thus, e.l.f. Beauty has an ROCE of 18%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Personal Products industry average of 16%.

View our latest analysis for e.l.f. Beauty

In the above chart we have measured e.l.f. Beauty's 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 e.l.f. Beauty for free.

What Can We Tell From e.l.f. Beauty's ROCE Trend?

The trends we've noticed at e.l.f. Beauty are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 18%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 105%. So we're very much inspired by what we're seeing at e.l.f. Beauty thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 27% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From e.l.f. Beauty's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what e.l.f. Beauty has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 2 warning signs for e.l.f. Beauty that we think you should be aware of.

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.