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We're Watching These Trends At United-Guardian (NASDAQ:UG)

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Looking at United-Guardian (NASDAQ:UG), it does have a high ROCE right now, but lets see how returns are trending.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for United-Guardian, this is the formula:

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Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.49 = US$5.3m ÷ (US$13m - US$2.0m) (Based on the trailing twelve months to June 2020).

Thus, United-Guardian has an ROCE of 49%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.

Check out our latest analysis for United-Guardian

roce
roce

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how United-Guardian has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is United-Guardian's ROCE Trending?

Over the past five years, United-Guardian's ROCE has remained relatively flat while the business is using 31% less capital than before. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. However, the business's operational efficiency is still impressive considering the ROCE is high in absolute terms.

The Bottom Line

In summary, United-Guardian isn't reinvesting funds back into the business and returns aren't growing. Unsurprisingly, the stock has only gained 7.4% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a final note, we've found 2 warning signs for United-Guardian that we think you should be aware of.

United-Guardian is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.