To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 Uni-Select (TSE:UNS) 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. The formula for this calculation on Uni-Select is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.029 = US$29m ÷ (US$1.3b - US$355m) (Based on the trailing twelve months to September 2020).
Therefore, Uni-Select has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Retail Distributors industry average of 26%.
In the above chart we have measured Uni-Select'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 Uni-Select here for free.
What Can We Tell From Uni-Select's ROCE Trend?
We weren't thrilled with the trend because Uni-Select's ROCE has reduced by 83% over the last five years, while the business employed 111% more capital. Usually this isn't ideal, but given Uni-Select conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Uni-Select probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.On a side note, Uni-Select has done well to pay down its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Key Takeaway
From the above analysis, we find it rather worrisome that returns on capital and sales for Uni-Select have fallen, meanwhile the business is employing more capital than it was five years ago. We expect this has contributed to the stock plummeting 71% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
On a final note, we found 2 warning signs for Uni-Select (1 doesn't sit too well with us) you should be aware of.
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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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.
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