Stock Analysis

Here's What's Concerning About Ollie's Bargain Outlet Holdings' (NASDAQ:OLLI) Returns On Capital

NasdaqGM:OLLI
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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. 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 Ollie's Bargain Outlet Holdings (NASDAQ:OLLI), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. To calculate this metric for Ollie's Bargain Outlet Holdings, this is the formula:

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

0.069 = US$121m ÷ (US$2.0b - US$254m) (Based on the trailing twelve months to July 2022).

Therefore, Ollie's Bargain Outlet Holdings has an ROCE of 6.9%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 13%.

Our analysis indicates that OLLI is potentially overvalued!

roce
NasdaqGM:OLLI Return on Capital Employed November 9th 2022

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Ollie's Bargain Outlet Holdings' ROCE Trending?

On the surface, the trend of ROCE at Ollie's Bargain Outlet Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.9% from 13% 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 may take some time before the company starts to see any change in earnings from these investments.

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 with the stock having returned a mere 24% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you'd like to know about the risks facing Ollie's Bargain Outlet Holdings, we've discovered 1 warning sign that 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.

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.