There Are Reasons To Feel Uneasy About a.k.a. Brands Holding's (NYSE:AKA) Returns On 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at a.k.a. Brands Holding (NYSE:AKA) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for a.k.a. Brands Holding:

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

0.047 = US$28m ÷ (US$699m - US$109m) (Based on the trailing twelve months to June 2022).

So, a.k.a. Brands Holding has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Online Retail industry average of 13%.

Our analysis indicates that AKA is potentially undervalued!

In the above chart we have measured a.k.a. Brands Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering a.k.a. Brands Holding here for free.

What Can We Tell From a.k.a. Brands Holding's ROCE Trend?

When we looked at the ROCE trend at a.k.a. Brands Holding, we didn't gain much confidence. Over the last two years, returns on capital have decreased to 4.7% from 9.2% two years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From a.k.a. Brands Holding's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for a.k.a. Brands Holding. Despite these promising trends, the stock has collapsed 83% over the last year, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

On a final note, we've found 1 warning sign for a.k.a. Brands Holding that we think 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.