3U Holding's (ETR:UUU) Returns On Capital Are Heading Higher

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, 3U Holding (ETR:UUU) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for 3U Holding:

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

0.0062 = €466k ÷ (€88m - €13m) (Based on the trailing twelve months to September 2020).

Therefore, 3U Holding has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Industrials industry average of 5.5%.

Check out our latest analysis for 3U Holding

In the above chart we have measured 3U Holding'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 3U Holding here for free.

What The Trend Of ROCE Can Tell Us

We're delighted to see that 3U Holding is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.6% on its capital. While returns have increased, the amount of capital employed by 3U Holding has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Key Takeaway

To sum it up, 3U Holding is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 399% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

3U Holding does have some risks though, and we've spotted 4 warning signs for 3U Holding 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. 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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