A Look Into Unilever's (LON:ULVR) Impressive Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. That's why when we briefly looked at Unilever's (LON:ULVR) ROCE trend, we were very happy with what we saw.

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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 Unilever, this is the formula:

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

0.21 = €11b ÷ (€80b - €25b) (Based on the trailing twelve months to December 2024).

So, Unilever has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

Check out our latest analysis for Unilever

Above you can see how the current ROCE for Unilever 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 analyst report for Unilever .

The Trend Of ROCE

In terms of Unilever's history of ROCE, it's quite impressive. The company has employed 24% more capital in the last five years, and the returns on that capital have remained stable at 21%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

What We Can Learn From Unilever's ROCE

In summary, we're delighted to see that Unilever has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And given the stock has only risen 36% over the last five years, we'd suspect the market is beginning to recognize these trends. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

If you want to continue researching Unilever, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.