a.k.a. Brands Holding (NYSE:AKA) May Have Issues Allocating Its Capital
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think a.k.a. Brands Holding (NYSE:AKA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is 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)
0.032 = US$18m ÷ (US$670m - US$109m) (Based on the trailing twelve months to September 2022).
Therefore, a.k.a. Brands Holding has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Online Retail industry average of 10%.
View our latest analysis for a.k.a. Brands Holding
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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is a.k.a. Brands Holding's ROCE Trending?
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 3.2% from 12% two years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line On 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. But since the stock has dived 72% in the last year, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.
a.k.a. Brands Holding could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
While a.k.a. Brands Holding 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.
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