There Are Reasons To Feel Uneasy About United Malt Group's (ASX:UMG) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at United Malt Group (ASX:UMG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 Malt Group, this is the formula:

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

0.037 = AU$59m ÷ (AU$1.9b - AU$359m) (Based on the trailing twelve months to March 2022).

Therefore, United Malt Group has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Food industry average of 7.1%.

See our latest analysis for United Malt Group

In the above chart we have measured United Malt 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 Malt Group here for free.

What Can We Tell From United Malt Group's ROCE Trend?

On the surface, the trend of ROCE at United Malt Group doesn't inspire confidence. Around two years ago the returns on capital were 9.4%, but since then they've fallen to 3.7%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, United Malt Group has decreased its current liabilities to 19% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by United Malt Group's reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 32% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think United Malt Group has the makings of a multi-bagger.

United Malt Group does have some risks though, and we've spotted 2 warning signs for United Malt Group that you might be interested in.

While United Malt Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.