Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at UDG Healthcare (LON:UDG), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for UDG Healthcare:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = US$131m ÷ (US$1.8b - US$311m) (Based on the trailing twelve months to September 2020).
Thus, UDG Healthcare has an ROCE of 9.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.0%.
Above you can see how the current ROCE for UDG Healthcare compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for UDG Healthcare.
So How Is UDG Healthcare's ROCE Trending?
In terms of UDG Healthcare's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 9.0% and the business has deployed 21% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
On a side note, UDG Healthcare has done well to reduce current liabilities to 18% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.
The Key Takeaway
In conclusion, UDG Healthcare has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 48% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
UDG Healthcare could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
While UDG Healthcare 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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