Stock Analysis

Be Wary Of Ollie's Bargain Outlet Holdings (NASDAQ:OLLI) And Its Returns On Capital

NasdaqGM:OLLI
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Ollie's Bargain Outlet Holdings (NASDAQ:OLLI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Ollie's Bargain Outlet Holdings is:

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

0.073 = US$130m ÷ (US$2.0b - US$259m) (Based on the trailing twelve months to January 2023).

Thus, Ollie's Bargain Outlet Holdings has an ROCE of 7.3%. Ultimately, that's a low return and it under-performs the Multiline Retail industry average of 12%.

View our latest analysis for Ollie's Bargain Outlet Holdings

roce
NasdaqGM:OLLI Return on Capital Employed May 30th 2023

In the above chart we have measured Ollie's Bargain Outlet Holdings' 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 Ollie's Bargain Outlet Holdings.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Ollie's Bargain Outlet Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.3% from 15% five years ago. However it looks like Ollie's Bargain Outlet 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Ollie's Bargain Outlet Holdings' ROCE

In summary, Ollie's Bargain Outlet Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 28% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a separate note, we've found 2 warning signs for Ollie's Bargain Outlet Holdings you'll probably want to know about.

While Ollie's Bargain Outlet Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Valuation is complex, but we're helping make it simple.

Find out whether Ollie's Bargain Outlet Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.