The Returns On Capital At Lulu's Fashion Lounge Holdings (NASDAQ:LVLU) Don't Inspire Confidence

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Lulu's Fashion Lounge Holdings (NASDAQ:LVLU), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. 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)

0.092 = US$10m ÷ (US$180m - US$70m) (Based on the trailing twelve months to October 2022).

Thus, Lulu's Fashion Lounge Holdings has an ROCE of 9.2%. In absolute terms, that's a low return and it also under-performs the Online Retail industry average of 14%.

Check out our latest analysis for Lulu's Fashion Lounge Holdings

In the above chart we have measured Lulu's Fashion Lounge Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Lulu's Fashion Lounge Holdings here for free.

The Trend Of ROCE

When we looked at the ROCE trend at Lulu's Fashion Lounge Holdings, we didn't gain much confidence. Around four years ago the returns on capital were 34%, but since then they've fallen to 9.2%. 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.

In Conclusion...

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. Despite these promising trends, the stock has collapsed 77% over the last year, so there could be other factors hurting the company's prospects. Therefore, we'd suggest researching the stock further to uncover more about the business.

Like most companies, Lulu's Fashion Lounge Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

While Lulu's Fashion Lounge 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.