Returns on Capital Paint A Bright Future For Ulta Beauty (NASDAQ:ULTA)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. And in light of that, the trends we're seeing at Ulta Beauty's (NASDAQ:ULTA) look very promising so lets take a look.

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 Ulta Beauty, this is the formula:

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

0.44 = US$1.6b ÷ (US$5.4b - US$1.7b) (Based on the trailing twelve months to January 2023).

Thus, Ulta Beauty has an ROCE of 44%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 15%.

See 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 to see what analysts are forecasting going forward, you should check out our free report for Ulta Beauty.

So How Is Ulta Beauty's ROCE Trending?

The trends we've noticed at Ulta Beauty are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 44%. The amount of capital employed has increased too, by 63%. So we're very much inspired by what we're seeing at Ulta Beauty thanks to its ability to profitably reinvest capital.

Our Take On Ulta Beauty's ROCE

To sum it up, Ulta Beauty has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 96% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Ulta Beauty does have some risks though, and we've spotted 1 warning sign for Ulta Beauty that you might be interested in.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.