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Did you know there are some financial metrics that can provide clues of a potential 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Tokyo Lifestyle (NASDAQ:TKLF) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. Analysts use this formula to calculate it for Tokyo Lifestyle:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$8.7m ÷ (US$159m - US$108m) (Based on the trailing twelve months to September 2024).
Therefore, Tokyo Lifestyle has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Specialty Retail industry average of 13% it's much better.
Check out our latest analysis for Tokyo Lifestyle
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Tokyo Lifestyle.
What Can We Tell From Tokyo Lifestyle's ROCE Trend?
We weren't thrilled with the trend because Tokyo Lifestyle's ROCE has reduced by 55% over the last five years, while the business employed 134% more capital. That being said, Tokyo Lifestyle raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Tokyo Lifestyle probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
On a side note, Tokyo Lifestyle's current liabilities are still rather high at 68% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Tokyo Lifestyle's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Tokyo Lifestyle. Despite these promising trends, the stock has collapsed 89% over the last three years, so there could be other factors hurting the company's prospects. Therefore, we'd suggest researching the stock further to uncover more about the business.