Nasdaq
華爾街日報Tokyo Lifestyle (NASDAQ:TKLF) Could Be Struggling To Allocate Capital
There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after investigating Tokyo Lifestyle (NASDAQ:TKLF), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Tokyo Lifestyle is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$7.2m ÷ (US$197m - US$141m) (Based on the trailing twelve months to September 2025).
Therefore, Tokyo Lifestyle has an ROCE of 13%. That's a pretty standard return and it's in line with the industry average of 13%.
See 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'd like to look at how Tokyo Lifestyle has performed in the past in other metrics, you can view this free graph of Tokyo Lifestyle's past earnings, revenue and cash flow.
The Trend Of ROCE
When we looked at the ROCE trend at Tokyo Lifestyle, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 36% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, Tokyo Lifestyle's current liabilities are still rather high at 72% 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 Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that Tokyo Lifestyle is reinvesting for growth and has higher sales as a result. Despite these promising trends, the stock has collapsed 77% over the last three years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.
Tokyo Lifestyle does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is concerning...
While Tokyo Lifestyle isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.