Returns On Capital Signal Tricky Times Ahead For Lulu's Fashion Lounge Holdings (NASDAQ:LVLU)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Lulu's Fashion Lounge Holdings (NASDAQ:LVLU) 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?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Lulu's Fashion Lounge Holdings:

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

0.073 = US$8.7m ÷ (US$167m - US$48m) (Based on the trailing twelve months to January 2023).

Thus, Lulu's Fashion Lounge Holdings has an ROCE of 7.3%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 15%.

See our latest analysis for Lulu's Fashion Lounge Holdings

Above you can see how the current ROCE for Lulu's Fashion Lounge Holdings 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 report for Lulu's Fashion Lounge Holdings.

So How Is Lulu's Fashion Lounge Holdings' ROCE Trending?

In terms of Lulu's Fashion Lounge Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.3% from 53% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

While returns have fallen for Lulu's Fashion Lounge Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. But since the stock has dived 77% in the last year, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.

On a final note, we've found 3 warning signs for Lulu's Fashion Lounge Holdings that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.