Yahoo Finance United Carpets Group plc (LON:UCG) Earns A Nice Return On Capital Employed
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Today we’ll look at United Carpets Group plc (LON:UCG) and reflect on its potential as an investment. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for United Carpets Group:
0.18 = UK£1.5m ÷ (UK£10.0m – UK£4.3m) (Based on the trailing twelve months to September 2018.)
Therefore, United Carpets Group has an ROCE of 18%.
Check out our latest analysis for United Carpets Group
Is United Carpets Group’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that United Carpets Group’s ROCE is meaningfully better than the 13% average in the Specialty Retail industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how United Carpets Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
United Carpets Group’s current ROCE of 18% is lower than 3 years ago, when the company reported a 29% ROCE. This makes us wonder if the business is facing new challenges.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for United Carpets Group.
Do United Carpets Group’s Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
United Carpets Group has total assets of UK£10.0m and current liabilities of UK£4.3m. Therefore its current liabilities are equivalent to approximately 43% of its total assets. United Carpets Group has a middling amount of current liabilities, increasing its ROCE somewhat.
What We Can Learn From United Carpets Group’s ROCE
While its ROCE looks good, it’s worth remembering that the current liabilities are making the business look better. You might be able to find a better buy than United Carpets Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
