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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at LifeVantage (NASDAQ:LFVN), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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 LifeVantage is:

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

0.16 = US$6.2m ÷ (US$61m - US$22m) (Based on the trailing twelve months to September 2024).

Thus, LifeVantage has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 14% generated by the Personal Products industry.

Check out our latest analysis for LifeVantage

Above you can see how the current ROCE for LifeVantage 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 LifeVantage .

The Trend Of ROCE

When we looked at the ROCE trend at LifeVantage, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 16% from 36% five years ago. However it looks like LifeVantage 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.

What We Can Learn From LifeVantage's ROCE

Bringing it all together, while we're somewhat encouraged by LifeVantage's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 6.0% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

LifeVantage does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.