Will The ROCE Trend At UniVision Engineering (LON:UVEL) Continue?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. With that in mind, we've noticed some promising trends at UniVision Engineering (LON:UVEL) so let's look a bit deeper.

Understanding 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. To calculate this metric for UniVision Engineering, this is the formula:

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

0.056 = UK£504k ÷ (UK£14m - UK£5.4m) (Based on the trailing twelve months to September 2020).

So, UniVision Engineering has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.2%.

See our latest analysis for UniVision Engineering

Historical performance is a great place to start when researching a stock so above you can see the gauge for UniVision Engineering's ROCE against it's prior returns. If you'd like to look at how UniVision Engineering has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is UniVision Engineering's ROCE Trending?

We're delighted to see that UniVision Engineering is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 5.6% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, UniVision Engineering is utilizing 70% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Our Take On UniVision Engineering's ROCE

Long story short, we're delighted to see that UniVision Engineering's reinvestment activities have paid off and the company is now profitable. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know more about UniVision Engineering, we've spotted 2 warning signs, and 1 of them is concerning.

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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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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