Brilliant Earth Group (NASDAQ:BRLT) Shareholders Will Want The ROCE Trajectory To Continue

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. Speaking of which, we noticed some great changes in Brilliant Earth Group's (NASDAQ:BRLT) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Brilliant Earth Group, this is the formula:

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

0.023 = US$4.5m ÷ (US$274m - US$77m) (Based on the trailing twelve months to December 2023).

So, Brilliant Earth Group has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 14%.

See our latest analysis for Brilliant Earth Group

In the above chart we have measured Brilliant Earth Group's 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 Brilliant Earth Group .

What Can We Tell From Brilliant Earth Group's ROCE Trend?

Brilliant Earth Group has recently broken into profitability so their prior investments seem to be paying off. About four years ago the company was generating losses but things have turned around because it's now earning 2.3% on its capital. Not only that, but the company is utilizing 721% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 28%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On Brilliant Earth Group's ROCE

To the delight of most shareholders, Brilliant Earth Group has now broken into profitability. And since the stock has fallen 20% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, Brilliant Earth Group does come with some risks, and we've found 1 warning sign that you should be aware of.

While Brilliant Earth Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.