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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at UNITEDLABELS (ETR:ULC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. To calculate this metric for UNITEDLABELS, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = €1.1m ÷ (€28m - €16m) (Based on the trailing twelve months to September 2024).
So, UNITEDLABELS has an ROCE of 9.5%. In absolute terms, that's a low return and it also under-performs the Leisure industry average of 17%.
Check out our latest analysis for UNITEDLABELS
In the above chart we have measured UNITEDLABELS' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for UNITEDLABELS .
So How Is UNITEDLABELS' ROCE Trending?
The returns on capital haven't changed much for UNITEDLABELS in recent years. Over the past five years, ROCE has remained relatively flat at around 9.5% and the business has deployed 39% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
On a side note, UNITEDLABELS' current liabilities are still rather high at 59% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
In Conclusion...
In summary, UNITEDLABELS has simply been reinvesting capital and generating the same low rate of return as before. And investors may be recognizing these trends since the stock has only returned a total of 6.9% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.