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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at United Foods Company (PSC) (DFM:UFC) and its ROCE trend, we weren't exactly thrilled.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on United Foods Company (PSC) is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.035 = د.إ11m ÷ (د.إ397m - د.إ78m) (Based on the trailing twelve months to September 2021).
Thus, United Foods Company (PSC) has an ROCE of 3.5%. On its own, that's a low figure but it's around the 3.9% average generated by the Food industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for United Foods Company (PSC)'s ROCE against it's prior returns. If you're interested in investigating United Foods Company (PSC)'s past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
In terms of United Foods Company (PSC)'s historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.5% from 10% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that United Foods Company (PSC) is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 65% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
United Foods Company (PSC) does have some risks though, and we've spotted 3 warning signs for United Foods Company (PSC) that you might be interested in.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.