Ucal Fuel Systems (NSE:UCALFUEL) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Ucal Fuel Systems (NSE:UCALFUEL), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Ucal Fuel Systems, this is the formula:

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

0.12 = ₹621m ÷ (₹8.4b - ₹3.4b) (Based on the trailing twelve months to September 2021).

Thus, Ucal Fuel Systems has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 13% generated by the Auto Components industry.

See our latest analysis for Ucal Fuel Systems

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ucal Fuel Systems' ROCE against it's prior returns. If you're interested in investigating Ucal Fuel Systems' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Ucal Fuel Systems' ROCE Trending?

When we looked at the ROCE trend at Ucal Fuel Systems, we didn't gain much confidence. To be more specific, ROCE has fallen from 25% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Ucal Fuel Systems has done well to pay down its current liabilities to 41% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line On Ucal Fuel Systems' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Ucal Fuel Systems is reinvesting for growth and has higher sales as a result. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we found 4 warning signs for Ucal Fuel Systems (2 are concerning) you should be aware of.

While Ucal Fuel Systems 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. 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.