Ollie's Bargain Outlet Holdings (NASDAQ:OLLI) Might Be Having Difficulty Using Its Capital Effectively

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 investigating Ollie's Bargain Outlet Holdings (NASDAQ:OLLI), we don't think it's current trends fit the mold of a multi-bagger.

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. 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)

0.087 = US$150m ÷ (US$2.0b - US$258m) (Based on the trailing twelve months to April 2022).

Therefore, Ollie's Bargain Outlet Holdings has an ROCE of 8.7%. Ultimately, that's a low return and it under-performs the Multiline Retail industry average of 12%.

Check out our latest analysis for Ollie's Bargain Outlet Holdings

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.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Ollie's Bargain Outlet Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Ollie's Bargain Outlet Holdings' ROCE

In summary, we're somewhat concerned by Ollie's Bargain Outlet Holdings' diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 36% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we've found 1 warning sign for Ollie's Bargain Outlet Holdings that we think you should be aware of.

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.

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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.