Universal Store Holdings (ASX:UNI) Has Some Way To Go To Become A Multi-Bagger

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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. In light of that, when we looked at Universal Store Holdings (ASX:UNI) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Universal Store Holdings is:

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

0.19 = AU$32m ÷ (AU$224m - AU$55m) (Based on the trailing twelve months to December 2021).

Thus, Universal Store Holdings has an ROCE of 19%. By itself that's a normal return on capital and it's in line with the industry's average returns of 19%.

View our latest analysis for Universal Store Holdings

Above you can see how the current ROCE for Universal Store Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

Things have been pretty stable at Universal Store Holdings, with its capital employed and returns on that capital staying somewhat the same for the last one year. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Universal Store Holdings to be a multi-bagger going forward. That probably explains why Universal Store Holdings has been paying out 64% of its earnings as dividends to shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

In Conclusion...

In a nutshell, Universal Store Holdings has been trudging along with the same returns from the same amount of capital over the last one year. Since the stock has declined 54% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Universal Store Holdings has the makings of a multi-bagger.

On a final note, we've found 2 warning signs for Universal Store Holdings that we think you should be aware of.

While Universal Store Holdings 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.

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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.