Returns At e.l.f. Beauty (NYSE:ELF) Are On The Way Up

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at e.l.f. Beauty (NYSE:ELF) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for e.l.f. Beauty, this is the formula:

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

0.089 = US$40m ÷ (US$514m - US$62m) (Based on the trailing twelve months to June 2022).

Thus, e.l.f. Beauty has an ROCE of 8.9%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 18%.

View our latest analysis for e.l.f. Beauty

Above you can see how the current ROCE for e.l.f. Beauty compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for e.l.f. Beauty.

So How Is e.l.f. Beauty's ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 8.9%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 31%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From e.l.f. Beauty's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what e.l.f. Beauty has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 88% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing, we've spotted 1 warning sign facing e.l.f. Beauty that you might find interesting.

While e.l.f. Beauty isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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