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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Brilliant Earth Group (NASDAQ:BRLT), we don't think it's current trends fit the mold of a multi-bagger.
What Is 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. The formula for this calculation on Brilliant Earth Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.011 = US$2.1m ÷ (US$273m - US$72m) (Based on the trailing twelve months to September 2024).
Thus, Brilliant Earth Group has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 13%.
View our latest analysis for Brilliant Earth Group
Above you can see how the current ROCE for Brilliant Earth Group 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 analyst report for Brilliant Earth Group .
So How Is Brilliant Earth Group's ROCE Trending?
When we looked at the ROCE trend at Brilliant Earth Group, we didn't gain much confidence. Around four years ago the returns on capital were 45%, but since then they've fallen to 1.1%. However it looks like Brilliant Earth Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.
On a side note, Brilliant Earth Group has done well to pay down its current liabilities to 27% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.