# Tilly’s Inc (NYSE:TLYS): The Return Story

I am writing today to help inform people who are new to the stock market and looking to gauge the potential return on investment in Tilly’s Inc (NYSE:TLYS).

Purchasing Tilly’s gives you an ownership stake in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. Your return is tied to TLYS’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Thus, to understand how your money can grow by investing in Tilly’s, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).

### Calculating Return On Capital Employed for TLYS

When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. We’ll look at Tilly’s’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. I have calculated Tilly’s’s ROCE for you below:

ROCE Calculation for TLYS

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = US\$27.2m ÷ (US\$259.9m – US\$62.8m) = 13.8%

TLYS’s 13.8% ROCE means that for every \$100 you invest, the company creates \$13.8. This makes Tilly’s slightly mediocre when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future, investor capital will be able to compound over time, but still may be missing out on some potential growth elsewhere.

### Then why have investors invested?

Although Tilly’s is in an unfavourable position, you should know that this could change if the company is able to increase earnings on the same capital base or find new efficiencies that require less capital to produce earnings. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Three years ago, TLYS’s ROCE was 12.1%, which means the company’s capital returns have improved. We can see that earnings have increased from US\$25.1m to US\$27.2m whilst capital employed has declined in response to a decline in total assets and a larger reliance on current liabilities (increased borrowing to fund operations) , which means the company has been able to improve ROCE by growing earnings and simultaneously putting less capital to work.

### Next Steps

ROCE for TLYS investors is below the desired level at the moment, however, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation to determine whether there is potential for return by focusing our attention elsewhere. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate TLYS or move on to other alternatives.

1. Future Outlook: What are well-informed industry analysts predicting for TLYS’s future growth? Take a look at our free research report of analyst consensus for TLYS’s outlook.
2. Valuation: What is TLYS worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether TLYS is currently undervalued by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.