Yahoo Finance The Trends At United Utilities Group (LON:UU.) That You Should Know About
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think United Utilities Group (LON:UU.) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. Analysts use this formula to calculate it for United Utilities Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = UK£690m ÷ (UK£15b - UK£1.2b) (Based on the trailing twelve months to September 2020).
So, United Utilities Group has an ROCE of 5.2%. Even though it's in line with the industry average of 5.2%, it's still a low return by itself.
View our latest analysis for United Utilities Group
In the above chart we have measured United Utilities Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering United Utilities Group here for free.
The Trend Of ROCE
There are better returns on capital out there than what we're seeing at United Utilities Group. The company has consistently earned 5.2% for the last five years, and the capital employed within the business has risen 29% in that time. 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.
The Bottom Line
In conclusion, United Utilities Group has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly, the stock has only gained 22% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
On a final note, we found 4 warning signs for United Utilities Group (2 are significant) you should be aware of.
While United Utilities Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
This article by Simply Wall St is general in nature. 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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