Be Wary Of Aritzia (TSE:ATZ) And Its Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Aritzia (TSE:ATZ) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Aritzia is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.11 = CA$194m ÷ (CA$2.2b - CA$511m) (Based on the trailing twelve months to September 2024).

Therefore, Aritzia has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.

Check out our latest analysis for Aritzia

Above you can see how the current ROCE for Aritzia compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Aritzia .

When we looked at the ROCE trend at Aritzia, we didn't gain much confidence. To be more specific, ROCE has fallen from 17% over the last five years. However it looks like Aritzia 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.

In summary, Aritzia is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 179% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Aritzia does have some risks though, and we've spotted 1 warning sign for Aritzia that you might be interested in.

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