Yahoo Finance Why You Should Care About Ulta Beauty's (NASDAQ:ULTA) Strong Returns On Capital
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Ulta Beauty's (NASDAQ:ULTA) trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Ulta Beauty is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.31 = US$1.1b ÷ (US$5.0b - US$1.4b) (Based on the trailing twelve months to July 2021).
So, Ulta Beauty has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 20% earned by companies in a similar industry.
Check out our latest analysis for Ulta Beauty
In the above chart we have measured Ulta Beauty's 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 Ulta Beauty here for free.
What The Trend Of ROCE Can Tell Us
In terms of Ulta Beauty's history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 31% and the business has deployed 97% more capital into its operations. Now considering ROCE is an attractive 31%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.
What We Can Learn From Ulta Beauty's ROCE
In summary, we're delighted to see that Ulta Beauty has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has followed suit returning a meaningful 58% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
One more thing, we've spotted 1 warning sign facing Ulta Beauty that you might find interesting.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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