Duluth Holdings' (NASDAQ:DLTH) Returns On Capital Not Reflecting Well On The Business

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at Duluth Holdings (NASDAQ:DLTH), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Duluth Holdings:

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

0.10 = US$41m ÷ (US$503m - US$108m) (Based on the trailing twelve months to May 2022).

So, Duluth Holdings has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 12% generated by the Online Retail industry.

Check out our latest analysis for Duluth Holdings

Above you can see how the current ROCE for Duluth Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Duluth Holdings here for free.

What Does the ROCE Trend For Duluth Holdings Tell Us?

On the surface, the trend of ROCE at Duluth Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 25% over the last five years. However it looks like Duluth Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Duluth Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Duluth Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 50% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Duluth Holdings could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Duluth Holdings 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.