Yahoo Finance Investors Could Be Concerned With UNITEDLABELS' (ETR:ULC) Returns On Capital
When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into UNITEDLABELS (ETR:ULC), we weren't too upbeat about how things were going.
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 UNITEDLABELS:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0026 = €28k ÷ (€22m - €11m) (Based on the trailing twelve months to September 2022).
So, UNITEDLABELS has an ROCE of 0.3%. 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
Historical performance is a great place to start when researching a stock so above you can see the gauge for UNITEDLABELS' ROCE against it's prior returns. If you'd like to look at how UNITEDLABELS has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is UNITEDLABELS' ROCE Trending?
In terms of UNITEDLABELS' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 7.3% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on UNITEDLABELS becoming one if things continue as they have.
On a side note, UNITEDLABELS has done well to pay down its current liabilities to 49% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 49% is still pretty high, so those risks are still somewhat prevalent.
Our Take On UNITEDLABELS' ROCE
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 40% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
On a final note, we've found 2 warning signs for UNITEDLABELS that we think you should be aware of.
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.
