Capital Investments At Ulta Beauty (NASDAQ:ULTA) Point To A Promising Future

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. So, when we ran our eye over Ulta Beauty's (NASDAQ:ULTA) trend of ROCE, we really liked what we saw.

Understanding 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 Ulta Beauty is:

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

0.35 = US$1.3b ÷ (US$5.3b - US$1.6b) (Based on the trailing twelve months to October 2021).

So, Ulta Beauty has an ROCE of 35%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 21%.

View our latest analysis for Ulta Beauty

Above you can see how the current ROCE for Ulta Beauty compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ulta Beauty here for free.

So How Is Ulta Beauty's ROCE Trending?

In terms of Ulta Beauty's history of ROCE, it's quite impressive. The company has employed 93% more capital in the last five years, and the returns on that capital have remained stable at 35%. Now considering ROCE is an attractive 35%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Ulta Beauty can keep this up, we'd be very optimistic about its future.

What We Can Learn From Ulta Beauty's ROCE

In short, we'd argue Ulta Beauty has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Therefore it's no surprise that shareholders have earned a respectable 58% return if they held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

While Ulta Beauty looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether ULTA is currently trading for a fair price.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.