Here’s What Lululemon Athletica’s Strong Capital Returns Mean (NASDAQ: LULU)


If we are to find multi-bagger potential, there are often underlying trends that can provide clues. Among other things, we’ll want to see two things; first of all, a growth to recover on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Ergo, when we looked at the trends in ROCE at Lululemon Athletica (NASDAQ: LULU), we liked what we saw.

What is Return on Employee Capital (ROCE)?

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for Lululemon Athletica, here is the formula:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.33 = $ 1.1 billion ÷ ($ 4.4 billion – $ 981 million) (Based on the last twelve months up to August 2021).

So, Lululemon Athletica has a ROCE of 33%. In absolute terms, this is a great return and it’s even better than the luxury industry average of 14%.

See our latest review for Lululemon Athletica

NasdaqGS: LULU Return on capital employed on November 20, 2021

In the graph above, we measured Lululemon Athletica’s past ROCE against its past performance, but arguably the future is more important. If you want, you can check out analyst forecasts covering Lululemon Athletica here for free.

What the ROCE trend can tell us

Lululemon Athletica deserves to be congratulated on his returns. The company has steadily gained 33% over the past five years and the capital employed within the company has increased by 181% during this period. Now that the ROCE is attractive at 33%, this combination is actually quite attractive because it means that the company can constantly put money in to work and generate those high returns. You will see this by looking at well run companies or favorable business models.

Lululemon Athletica’s ROCE result

In the end, the company has proven that it can reinvest its capital at high rates of return, which you will recall is a hallmark of a multi-bagger. On top of that, the stock rewarded shareholders with a remarkable 716% return for those who have held it in the past five years. So while the stock may be “more expensive” than it used to be, we believe that the strong fundamentals warrant further research on this stock.

Like most businesses, Lululemon Athletica comes with some risk, and we’ve found 1 warning sign that you need to be aware of.

Lululemon Athletica isn’t the only stock to generate high returns. If you want to see more, check out our free List of companies delivering high returns on equity with strong fundamentals.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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