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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. Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Speaking of which, we noticed some great changes in Unicasa Indústria de Móveis’ (BVMF:UCAS3) returns on capital, so let’s have a look.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Unicasa Indústria de Móveis:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.19 = R$38m ÷ (R$314m – R$118m) (Based on the trailing twelve months to March 2022).
Therefore, Unicasa Indústria de Móveis has an ROCE of 19%. On its own, that’s a standard return, however it’s much better than the 6.6% generated by the Consumer Durables industry.
Check out our latest analysis for Unicasa Indústria de Móveis
Historical performance is a great place to start when researching a stock so above you can see the gauge for Unicasa Indústria de Móveis’ ROCE against it’s prior returns. If you’re interested in investigating Unicasa Indústria de Móveis’ past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Unicasa Indústria de Móveis has broken into the black (profitability) and we’re sure it’s a sight for sore eyes. The company now earns 19% on its capital, because five years ago it was incurring losses. On top of that, what’s interesting is that the amount of capital being employed has remained steady, so the business hasn’t needed to put any additional money to work to generate these higher returns. So while we’re happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.
For the record though, there was a noticeable increase in the company’s current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 38% of the business, which is more than it was five years ago. It’s worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
What We Can Learn From Unicasa Indústria de Móveis’ ROCE
In summary, we’re delighted to see that Unicasa Indústria de Móveis has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 74% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it’s worth researching the company further to see if these trends are likely to persist.
One more thing: We’ve identified 3 warning signs with Unicasa Indústria de Móveis (at least 1 which shouldn’t be ignored) , and understanding them would certainly be useful.
While Unicasa Indústria de Móveis isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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