Universal Cables' (NSE:UNIVCABLES) Returns On Capital Not Reflecting Well On The Business

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Universal Cables (NSE:UNIVCABLES) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Universal Cables is:

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

0.059 = ₹1.4b ÷ (₹33b - ₹10.0b) (Based on the trailing twelve months to March 2024).

Therefore, Universal Cables has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 18%.

See our latest analysis for Universal Cables

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Universal Cables' past further, check out this free graph covering Universal Cables' past earnings, revenue and cash flow.

So How Is Universal Cables' ROCE Trending?

On the surface, the trend of ROCE at Universal Cables doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 5.9%. However it looks like Universal Cables might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Universal Cables' ROCE

In summary, Universal Cables is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 270% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Universal Cables does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those don't sit too well with us...

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.