Investors Will Want United Polyfab Gujarat's (NSE:UNITEDPOLY) Growth In ROCE To Persist

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in United Polyfab Gujarat's (NSE:UNITEDPOLY) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for United Polyfab Gujarat, this is the formula:

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

0.063 = ₹101m ÷ (₹1.8b - ₹222m) (Based on the trailing twelve months to September 2020).

Therefore, United Polyfab Gujarat has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 12%.

View our latest analysis for United Polyfab Gujarat

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'd like to look at how United Polyfab Gujarat has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 6.3%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 524%. So we're very much inspired by what we're seeing at United Polyfab Gujarat thanks to its ability to profitably reinvest capital.

Our Take On United Polyfab Gujarat's ROCE

All in all, it's terrific to see that United Polyfab Gujarat is reaping the rewards from prior investments and is growing its capital base. Since the total return from the stock has been almost flat over the last three years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to know some of the risks facing United Polyfab Gujarat we've found 4 warning signs (3 are a bit unpleasant!) that you should be aware of before investing here.

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. 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.
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