Capital Allocation Trends At Estée Lauder Companies (NYSE:EL) Aren't Ideal
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Estée Lauder Companies (NYSE:EL), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Estée Lauder Companies:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$2.6b ÷ (US$21b - US$5.7b) (Based on the trailing twelve months to December 2022).
So, Estée Lauder Companies has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Personal Products industry average of 16%.
View 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 to see what analysts are forecasting going forward, you should check out our free report for Estée Lauder Companies.
How Are Returns Trending?
When we looked at the ROCE trend at Estée Lauder Companies, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 17% from 24% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
What We Can Learn From Estée Lauder Companies' ROCE
In summary, Estée Lauder Companies is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 67% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
Estée Lauder Companies does have some risks though, and we've spotted 3 warning signs for Estée Lauder Companies that you might be interested in.
While Estée Lauder Companies 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.
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