There are a few key trends to look for if we want to identify the next 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. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in United Polyfab Gujarat’s (NSE:UNITEDPOLY) returns on capital, so let’s have a look.
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. Analysts use this formula to calculate it for United Polyfab Gujarat:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.16 = ₹202m ÷ (₹2.1b – ₹805m) (Based on the trailing twelve months to March 2022).
So, United Polyfab Gujarat has an ROCE of 16%. In absolute terms, that’s a satisfactory return, but compared to the Luxury industry average of 13% it’s much better.
See our latest analysis for United Polyfab Gujarat
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, revenue and cash flow of United Polyfab Gujarat, check out these free graphs here.
How Are Returns Trending?
We like the trends that we’re seeing from United Polyfab Gujarat. Over the last five years, returns on capital employed have risen substantially to 16%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has increased too, by 28%. So we’re very much inspired by what we’re seeing at United Polyfab Gujarat thanks to its ability to profitably reinvest capital.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. 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. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that’s what United Polyfab Gujarat has. Since the stock has returned a staggering 725% to shareholders over the last three years, it looks like investors are recognizing these changes. 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.
If you’d like to know more about United Polyfab Gujarat, we’ve spotted 3 warning signs, and 2 of them make us uncomfortable.
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.