If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Estée Lauder Companies (NYSE:EL), we don’t think it’s current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Estée Lauder Companies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.10 = US$1.8b ÷ (US$23b – US$6.2b) (Based on the trailing twelve months to June 2023).
Therefore, Estée Lauder Companies has an ROCE of 10%. In isolation, that’s a pretty standard return but against the Personal Products industry average of 13%, it’s not as good.
See our latest analysis for Estée Lauder Companies
In the above chart we have measured Estée Lauder Companies’ 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 Estée Lauder Companies here for free.
What The Trend Of ROCE Can Tell Us
In terms of Estée Lauder Companies’ historical ROCE movements, the trend isn’t fantastic. To be more specific, ROCE has fallen from 24% over the last five years. And considering revenue has dropped while employing more capital, we’d be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven’t increased.
The Bottom Line
We’re a bit apprehensive about Estée Lauder Companies because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors must expect better things on the horizon though because the stock has risen 14% in the last five years. Either way, we aren’t huge fans of the current trends and so with that we think you might find better investments elsewhere.
Estée Lauder Companies does have some risks, we noticed 4 warning signs (and 2 which are a bit concerning) we think you should know about.
While Estée Lauder Companies 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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