Some Investors May Be Worried About Leslie's' (NASDAQ:LESL) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Looking at Leslie's (NASDAQ:LESL), it does have a high ROCE right now, but lets see how returns are trending.

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 Leslie's, this is the formula:

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

0.24 = US$212m ÷ (US$1.2b - US$292m) (Based on the trailing twelve months to April 2023).

So, Leslie's has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

Check out our latest analysis for Leslie's

In the above chart we have measured Leslie's' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Leslie's.

SWOT Analysis for Leslie's

What Can We Tell From Leslie's' ROCE Trend?

When we looked at the ROCE trend at Leslie's, we didn't gain much confidence. While it's comforting that the ROCE is high, four years ago it was 38%. 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.

The Bottom Line On Leslie's' ROCE

To conclude, we've found that Leslie's is reinvesting in the business, but returns have been falling. Since the stock has declined 53% 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 Leslie's has the makings of a multi-bagger.

If you want to continue researching Leslie's, you might be interested to know about the 3 warning signs that our analysis has discovered.

Leslie's is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.