There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after investigating Olaplex Holdings (NASDAQ:OLPX), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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 Olaplex Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = US$142m ÷ (US$1.7b - US$56m) (Based on the trailing twelve months to September 2023).
Thus, Olaplex Holdings has an ROCE of 8.4%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 14%.
View our latest analysis for Olaplex Holdings
Above you can see how the current ROCE for Olaplex Holdings 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 Olaplex Holdings.
So How Is Olaplex Holdings' ROCE Trending?
There are better returns on capital out there than what we're seeing at Olaplex Holdings. The company has employed 74% more capital in the last three years, and the returns on that capital have remained stable at 8.4%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
In Conclusion...
In summary, Olaplex Holdings has simply been reinvesting capital and generating the same low rate of return as before. And investors appear hesitant that the trends will pick up because the stock has fallen 51% in the last year. Therefore based on the analysis done in this article, we don't think Olaplex Holdings has the makings of a multi-bagger.
One more thing to note, we've identified 2 warning signs with Olaplex Holdings and understanding them should be part of your investment process.
While Olaplex Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
