What Should Investors Know About United Carpets Group PLC’s (LON:UCG) Return On Capital?

This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in United Carpets Group PLC (LON:UCG).

United Carpets Group stock represents an ownership share in the company. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. To understand United Carpets Group’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

Check out our latest analysis for United Carpets Group

United Carpets Group’s Return On Capital Employed

As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. We’ll look at United Carpets Group’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. I have calculated United Carpets Group’s ROCE for you below:

ROCE Calculation for UCG

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = UK£1.52m ÷ (UK£9.51m – UK£3.72m) = 26.32%

The calculation above shows that UCG’s earnings were 26.32% of capital employed. This makes United Carpets Group exceptionally profitable when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future and is able to either provide solid dividends or reinvestment opportunities, your capital will enlarge at a rapid rate over time.

AIM:UCG Last Perf August 15th 18
AIM:UCG Last Perf August 15th 18

Before moving forward

The encouraging ROCE is good news for United Carpets Group investors if the company is able to maintain strong earnings and control their capital needs. But if this doesn’t occur, UCG’s ROCE may deteriorate, in which case your money is better invested elsewhere. Therefore, investors need to be confident in the trend of the inputs in the formula above, so that United Carpets Group will continue the solid returns. If you go back three years, you’ll find that UCG’s ROCE has increased from 26.09%. We can see that earnings have increased from UK£1.21m to UK£1.52m whilst capital employed improved as well albeit by a relatively smaller amount, signifying ROCE increased as a result of a greater surge in earnings compared to the business’ use of capital.

Next Steps

UCG’s investors have enjoyed an upward trend in ROCE and it is currently at a level that makes the company an attractive candidate that is capable of producing solid capital returns, and hence, an attractive return on investment. As an investor this is the type of situation you look for, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. It’s important to account for these factors because you cannot be sure if this trend will continue or if you are getting a good deal for the future returns you are paying for. United Carpets Group’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.

  1. Future Outlook: What are well-informed industry analysts predicting for UCG’s future growth? Take a look at our free research report of analyst consensus for UCG’s outlook.
  2. Valuation: What is UCG worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether UCG is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.