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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Tokyo Lifestyle (of which 2 are potentially serious!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.