Some Investors May Be Worried About Universal Cables' (NSE:UNIVCABLES) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Having said that, from a first glance at Universal Cables (NSE:UNIVCABLES) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Universal Cables, this is the formula:

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

0.064 = ₹1.1b ÷ (₹28b - ₹9.6b) (Based on the trailing twelve months to June 2022).

So, Universal Cables has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Electrical industry average of 13%.

View our latest analysis for Universal Cables

Historical performance is a great place to start when researching a stock so above you can see the gauge for Universal Cables' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Universal Cables, check out these free graphs here.

How Are Returns Trending?

On the surface, the trend of ROCE at Universal Cables doesn't inspire confidence. To be more specific, ROCE has fallen from 8.2% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Universal Cables' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Universal Cables is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 107% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

Universal Cables does have some risks, we noticed 5 warning signs (and 2 which can't be ignored) we think you should know about.

While Universal Cables 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.