United Polyfab Gujarat (NSE:UNITEDPOLY) Is Looking To Continue Growing Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at United Polyfab Gujarat (NSE:UNITEDPOLY) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on United Polyfab Gujarat is:

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

0.12 = ₹160m ÷ (₹2.0b - ₹683m) (Based on the trailing twelve months to March 2023).

Therefore, United Polyfab Gujarat has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Luxury industry average of 11%.

View our latest analysis for United Polyfab Gujarat

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

What Does the ROCE Trend For United Polyfab Gujarat Tell Us?

We're pretty happy with how the ROCE has been trending at United Polyfab Gujarat. We found that the returns on capital employed over the last five years have risen by 354%. The company is now earning ₹0.1 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 21% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 35% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line

In a nutshell, we're pleased to see that United Polyfab Gujarat has been able to generate higher returns from less capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if United Polyfab Gujarat can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 3 warning signs with United Polyfab Gujarat (at least 1 which can't be ignored) , and understanding these would certainly be useful.

While United Polyfab Gujarat 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.