Ulta Beauty (NASDAQ:ULTA) Is Achieving High Returns On Its Capital

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Ulta Beauty's (NASDAQ:ULTA) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)

0.40 = US$1.3b ÷ (US$4.8b - US$1.6b) (Based on the trailing twelve months to January 2022).

Therefore, Ulta Beauty has an ROCE of 40%. That's a fantastic return and not only that, it outpaces the average of 18% earned by companies in a similar industry.

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

What Can We Tell From Ulta Beauty's ROCE Trend?

We like the trends that we're seeing from Ulta Beauty. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 40%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 58%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 33% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line

All in all, it's terrific to see that Ulta Beauty is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 54% return over the last five years. In light of that, we think it's worth looking further into this stock because if Ulta Beauty can keep these trends up, it could have a bright future ahead.

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.

Ulta Beauty is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.