Investors Could Be Concerned With Arhaus' (NASDAQ:ARHS) Returns On Capital

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Arhaus (NASDAQ:ARHS) 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. To calculate this metric for Arhaus, this is the formula:

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

0.12 = US$99m ÷ (US$1.2b - US$416m) (Based on the trailing twelve months to September 2024).

Thus, Arhaus has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 13% generated by the Specialty Retail industry.

Check out our latest analysis for Arhaus

Above you can see how the current ROCE for Arhaus compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Arhaus .

What Can We Tell From Arhaus' ROCE Trend?

On the surface, the trend of ROCE at Arhaus doesn't inspire confidence. To be more specific, ROCE has fallen from 26% over the last four years. 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.

On a side note, Arhaus has done well to pay down its current liabilities to 34% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

To conclude, we've found that Arhaus is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last three years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Arhaus has the makings of a multi-bagger.

One final note, you should learn about the 2 warning signs we've spotted with Arhaus (including 1 which shouldn't be ignored) .

While Arhaus isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.