The Returns On Capital At Brilliant Earth Group (NASDAQ:BRLT) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Brilliant Earth Group (NASDAQ:BRLT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Brilliant Earth Group, this is the formula:

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

0.068 = US$14m ÷ (US$273m - US$74m) (Based on the trailing twelve months to June 2023).

Therefore, Brilliant Earth Group has an ROCE of 6.8%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 13%.

View 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 report on analyst forecasts for the company.

What Does the ROCE Trend For Brilliant Earth Group Tell Us?

When we looked at the ROCE trend at Brilliant Earth Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 30% over the last three 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Brilliant Earth Group has done well to pay down its current liabilities to 27% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Brilliant Earth Group's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 48% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Brilliant Earth Group has the makings of a multi-bagger.

If you'd like to know about the risks facing Brilliant Earth Group, we've discovered 1 warning sign that you should be aware of.

While Brilliant Earth Group 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.