We Like These Underlying Return On Capital Trends At UV Germi (EPA:ALUVI)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at UV Germi (EPA:ALUVI) and its trend of ROCE, we really liked what we saw.

What Is 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 UV Germi:

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

0.034 = €317k ÷ (€11m - €1.8m) (Based on the trailing twelve months to June 2022).

Therefore, UV Germi has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.4%.

View our latest analysis for UV Germi

In the above chart we have measured UV Germi's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for UV Germi.

The Trend Of ROCE

We're delighted to see that UV Germi is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 3.4% on its capital. Not only that, but the company is utilizing 101% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

What We Can Learn From UV Germi's ROCE

Overall, UV Germi gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has only returned 1.8% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On a separate note, we've found 2 warning signs for UV Germi you'll probably want to know about.

While UV Germi 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.