If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we’ll want to see it a proven return is capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that the company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Ukrproduct Group (LON: UKR) Returns on capital, so let’s have a look.
What is Return On Capital Employed (ROCE)?
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Ukrproduct Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.046 = UK £ 303k ÷ (UK £ 24m – UK £ 17m) (Based on the trailing twelve months to June 2021).
Therefore, Ukrproduct Group has an ROCE of 4.6%. In Absolute terms, that’s a low return and it also under-performs the Food industry average of 10%.
See our latest analysis for Ukrproduct Group
While the past is not representative of the future, it can be helpful to know how the company has performed historically, which is why we have this chart above. If you’re interested in investigating the Ukrproduct Group’s past, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
The fact that Ukrproduct Group is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it’s earning 4.6% which is a sight for sore eyes. Not only that, but the company is utilizing 24% more capital than before, but that’s to be expected from a company trying to break into profitability. This can indicate that there are plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities have increased to 72% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it’s pretty high ratio, we’d remind investors that having current liabilities at those levels can bring about some risk in certain businesses.
The Bottom Line On Ukrproduct Group’s ROCE
Long story short, we’re delighted to see that Ukrproduct Group’s reinvestment activities have paid off and the company is now profitable. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising Trends warrant this stock for further investigation.
Ukrproduct Group does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.
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.
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.