Should You Be Impressed By ULS Technology's (LON:ULS) Returns on Capital?

What are the early trends we should look for to identify a stock that could 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at ULS Technology (LON:ULS) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on ULS Technology is:

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

0.13 = UK£2.0m ÷ (UK£25m - UK£9.6m) (Based on the trailing twelve months to September 2020).

So, ULS Technology has an ROCE of 13%. By itself that's a normal return on capital and it's in line with the industry's average returns of 13%.

Check out our latest analysis for ULS Technology

Above you can see how the current ROCE for ULS Technology 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 ULS Technology.

So How Is ULS Technology's ROCE Trending?

When we looked at the ROCE trend at ULS Technology, we didn't gain much confidence. Around five years ago the returns on capital were 36%, but since then they've fallen to 13%. 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.

In Conclusion...

In summary, we're somewhat concerned by ULS Technology's diminishing returns on increasing amounts of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 70% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know about the risks facing ULS Technology, we've discovered 4 warning signs that you should be aware of.

While ULS Technology 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. 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.
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