Returns On Capital - An Important Metric For United Polyfab Gujarat (NSE:UNITEDPOLY)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in United Polyfab Gujarat's (NSE:UNITEDPOLY) returns on capital, so let's have a look.

Understanding 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. 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).

Thus, United Polyfab Gujarat has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Luxury industry average of 9.5%.

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

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 6.3%. Basically the business is earning more per dollar of capital invested and in addition to that, 524% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On United Polyfab Gujarat's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what United Polyfab Gujarat has. And a remarkable 101% total return over the last three years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

United Polyfab Gujarat does have some risks, we noticed 3 warning signs (and 2 which are concerning) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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