Some Investors May Be Worried About Union Technologies Informatique Group's (EPA:FPG) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Union Technologies Informatique Group (EPA:FPG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Union Technologies Informatique Group, this is the formula:

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

0.066 = €594k ÷ (€18m - €8.7m) (Based on the trailing twelve months to December 2020).

Therefore, Union Technologies Informatique Group has an ROCE of 6.6%. In absolute terms, that's a low return and it also under-performs the IT industry average of 10%.

Check out our latest analysis for Union Technologies Informatique Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Union Technologies Informatique Group, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Union Technologies Informatique Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.6% from 18% 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.

On a side note, Union Technologies Informatique Group has done well to pay down its current liabilities to 49% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 49% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Union Technologies Informatique Group's ROCE

In summary, we're somewhat concerned by Union Technologies Informatique Group's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 15% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Union Technologies Informatique Group does have some risks though, and we've spotted 3 warning signs for Union Technologies Informatique Group 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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