If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. However, after investigating Uni-Select (TSE:UNS), we don't think it's current trends fit the mold of a multi-bagger.
What is 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. To calculate this metric for Uni-Select, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = US$28m ÷ (US$1.4b - US$360m) (Based on the trailing twelve months to December 2020).
Therefore, Uni-Select has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Retail Distributors industry average of 27%.
Above you can see how the current ROCE for Uni-Select compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Uni-Select here for free.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Uni-Select, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.8% from 14% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Key Takeaway
In summary, we're somewhat concerned by Uni-Select's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 61% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
Uni-Select does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...
While Uni-Select 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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