Looking Into Sally Beauty Holdings's Return On Capital Employed

Pulled from Benzinga Pro data, Sally Beauty Holdings SBH posted Q1 earnings of $50.34 million, an increase from Q4 of 135.89%. Sales dropped to $957.05 million, a 0.56% decrease between quarters. In Q4, Sally Beauty Holdings earned $21.34 million, whereas sales reached $962.46 million.

What Is Return On Capital Employed?

Return on Capital Employed is a measure of yearly pre-tax profit relative to capital employed by a business. Changes in earnings and sales indicate shifts in a company's ROCE. A higher ROCE is generally representative of successful growth of a company and is a sign of higher earnings per share in the future. A low or negative ROCE suggests the opposite. In Q1, Sally Beauty Holdings posted an ROCE of 0.13%.

Keep in mind, while ROCE is a good measure of a company's recent performance, it is not a highly reliable predictor of a company's earnings or sales in the near future.

ROCE is a powerful metric for comparing the effectiveness of capital allocation for similar companies. A relatively high ROCE shows Sally Beauty Holdings is potentially operating at a higher level of efficiency than other companies in its industry. If the company is generating high profits with its current level of capital, some of that money can be reinvested in more capital which will generally lead to higher returns and, ultimately, earnings per share (EPS) growth.

For Sally Beauty Holdings, the positive return on capital employed ratio of 0.13% suggests that management is allocating their capital effectively. Effective capital allocation is a positive indicator that a company will achieve more durable success and favorable long-term returns.