Here's What Torrid Holdings' (NYSE:CURV) Strong Returns On Capital Mean

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. That's why when we briefly looked at Torrid Holdings' (NYSE:CURV) ROCE trend, we were very happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Torrid Holdings, this is the formula:

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

0.22 = US$60m ÷ (US$567m - US$295m) (Based on the trailing twelve months to April 2022).

Therefore, Torrid Holdings has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.

Check out our latest analysis for Torrid Holdings

In the above chart we have measured Torrid Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Torrid Holdings.

What Does the ROCE Trend For Torrid Holdings Tell Us?

It's hard not to be impressed by Torrid Holdings' returns on capital. The company has consistently earned 22% for the last four years, and the capital employed within the business has risen 35% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.

Another point to note, we noticed the company has increased current liabilities over the last four years. This is intriguing because if current liabilities hadn't increased to 52% of total assets, this reported ROCE would probably be less than22% because total capital employed would be higher.The 22% ROCE could be even lower if current liabilities weren't 52% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

The Bottom Line On Torrid Holdings' ROCE

Torrid Holdings has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. Despite these impressive fundamentals, the stock has collapsed 82% over the last year, so there is likely other factors affecting the company's future prospects. So in light of that'd we think it's worthwhile looking further into this stock to see if there's any areas for concern.

Torrid Holdings does have some risks though, and we've spotted 2 warning signs for Torrid Holdings that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.