Here's What's Concerning About Ollie's Bargain Outlet Holdings' (NASDAQ:OLLI) Returns On Capital
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Ollie's Bargain Outlet Holdings (NASDAQ:OLLI), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Ollie's Bargain Outlet Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$197m ÷ (US$2.2b - US$289m) (Based on the trailing twelve months to October 2023).
Thus, Ollie's Bargain Outlet Holdings has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 12% generated by the Multiline Retail industry.
Check out our latest analysis for Ollie's Bargain Outlet Holdings
In the above chart we have measured Ollie's Bargain Outlet 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 analyst report for Ollie's Bargain Outlet Holdings .
What Does the ROCE Trend For Ollie's Bargain Outlet Holdings Tell Us?
When we looked at the ROCE trend at Ollie's Bargain Outlet Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 10%. 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 Ollie's Bargain Outlet Holdings' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Ollie's Bargain Outlet Holdings is reinvesting for growth and has higher sales as a result. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
If you're still interested in Ollie's Bargain Outlet Holdings it's worth checking out our FREE intrinsic value approximation for OLLI to see if it's trading at an attractive price in other respects.
While Ollie's Bargain Outlet Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
